S t o c k l a n d A n n u a l R e p o r t 2 0 1 Annual Report 2019 9 Focus on sustainable returns ACKNOWLEDGEMENT OF COUNTRY Stockland acknowledges the Traditional Owners and Custodians of the land on which we work and live within Australia. We would also like to pay our respects to their Elders past and present, and acknowledge the ongoing connection that Aboriginal and Torres Strait Islander peoples have with Australia’s land and waters. We believe there is a better way to live We shape places that enable a better way to live every day. More than just a property developer, since 1952 we have been creating places to enhance communities and the way people live. The Directors of Stockland Corporation Limited (ACN 000 181 733) and the Directors of Stockland Trust Management Limited (ACN 001 900 741, AFSL 241190), the Responsible Entity of Stockland Trust (ARSN 092 897 348), present their report together with the Financial report of Stockland and the Financial report of the Trust for the year ended 30 June 2019 and the Independent Auditor’s Report thereon. The Financial Report of Stockland comprises the consolidated Financial report of Stockland Corporation Limited and its controlled entities, including Stockland Trust and its controlled entities, (collectively referred to as ‘Stockland’ or ‘Group’). The Financial report of Stockland Trust comprises the consolidated Financial report of the Trust and its controlled entities (‘Stockland Trust Group’ or ‘the Trust’). 2019 performance Chairman and Managing Director’s letters Our business Strategy and performance Our strategy Grow asset returns Capital strength Operational excellence Business risks and our materiality process Climate-related risks A better way to deliver shared value Our approach to sustainability Shape thriving communities Optimise and innovate Enrich our value chain Governance and remuneration Our Board and governance Remuneration report Financial report Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flow Notes to the financial statements Directors’ declaration Independent auditor’s report Securityholder information and key dates Glossary 4 6 10 12 12 14 22 26 33 39 51 52 54 58 62 67 68 86 107 108 109 110 112 113 173 174 183 187 This year Stockland’s FY19 Annual Report has adopted the principles of the International Integrated Reporting Council’s (IIRC) International Integrated Reporting Framework to communicate our financial and non-financial achievements in one flagship document. Along with our Financial Report, the FY19 Annual Report outlines how we have created value for all our stakeholders to create places to enhance communities and the way people live. Additional information about our sustainability reporting and the methodology used for sustainability data collection in this report, including our assurance statement by Ernst & Young (EY), is available online: www.stockland.com.au/sustainability. Affina Town Homes Brightwater, QLD 2019 performance Funds from operations (FFO) $897m Up 4.0% on FY18 FFO per security 37.4c Up 5.1% on FY18 Distribution per security 27.6c Up 4.2% on FY18 Distribution payout ratio 74% Statutory profit per security 13.0c Down 69.3% % Return on equity (ROE) 11.9% Up 70bp Community contribution $7.4m Net tangible assets per security $4.04 Down from $4.18 at 30 June 2018 Total real estate assets $15.2bn Employee engagement 81% 4 points above the Australian National Norm I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y GOOD PROGRESS ON OUR STRATEGIC PRIORITIES Increased weighting to Workplace and Logistics to 23 per cent of our assets, including $99 million of developments completed and 294 hectares of land secured. Completed $192 million of our $350 million buy-back of Stockland securities to help support the resilience of securityholder returns into the future. Sale of three non-core retirement living villages for a combined total of approximately $60 million. Achieved $505 million of retail town centre divestments, exceeding our $400 million target of non-core retail divestments ahead of the anticipated timeframe. We will continue to assess the remainder of our $500 million non-core divestments over time in a disciplined way. Confirmed a 50 per cent capital partnership for our $5 billion Aura mixed use community on the Sunshine Coast, at a 30 per cent premium to book value, with Capital Property Group in July. Continued focus on customer satisfaction: Highest level of retirement living resident satisfaction since 2009 at 8.6 out of 10, residential communities resident satisfaction of 93 per cent, retailer satisfaction of 82.5 per cent, retail customer satisfaction of 80 per cent, and Workplace and Logistics tenant satisfaction of 84 per cent. Reduced unallocated corporate overheads by $5 million to $61 million, with additional savings forecast. 4 Stockland Annual Report 2019 5 Year ended 30 June 2019 Letter from the Chairman Dear Securityholders, FY19 has been a challenging year, however I am pleased to report our overall results are in line with market expectations. With tougher market conditions, an evolving regulatory environment and the general uncertainty that election campaigns bring, a continued focus on our strategic priorities has guided the business through the year and I’m pleased to present our progress in this report. We have delivered FFO earnings per security growth of 5.1 per cent over the year, in line with expectations. Statutory profit was down 69.6 per cent to $311 million reflecting non-cash adjustments arising from devaluations in our retail town centre and retirement living portfolios, a retirement living goodwill write down, mark-to-market on financial instruments and a tax expense change. Over the period we have continued to actively reposition the retail town centre portfolio to respond to ongoing changes in customer spending habits, with a clear focus on convenience and experience. Our strategy is focused on improving future income resilience and the growth of our portfolio by divesting non-core properties, ensuring rents are sustainable and remixing tenancies. During the year, we restructured our business and leadership team to position us for continued success and sustainable growth. This has enabled us to realise efficiencies, leverage expertise and stay ahead of the curve as customer preferences, innovation, technology and global trends continue to disrupt the property sector. Valuing our customers Confidence in corporate Australia has been tested over the past year with increased scrutiny on organisations and their interactions with customers. It is incumbent on all businesses to engage with customers in an ethical and considered manner, and this has been and will always be a priority for Stockland. Over the past year, the Board and executive team visited many Stockland assets and projects to understand the contribution we are making to communities across Australia and to hear first-hand what customers need and expect from us. Our customer focus continues to be one of our points of difference and helps us stand out from our competitors. From the Board down, we continue to look at how we engage with our customers and deliver on our promises on a day to day basis. When independently polled our residential customers, workplace and logistics tenants, and retirement living residents all reported satisfaction levels around or above 85 per cent, and retail customers and tenants reported over 80 per cent satisfaction. A fresh perspective During 2018, two new board appointees, Melinda Conrad and Christine O’Reilly, joined us, bringing a wealth of experience and industry expertise. Ms Conrad has over 25 years’ experience in customer-facing businesses, including successfully founding and operating her own retail business. Ms O’Reilly has deep experience in both financial and operational entities and has held a number of senior executive roles in diverse industries including CEO and Director of the GasNet Australia Group and Co-Head of Unlisted Infrastructure investments at Colonial First State Global Asset Management. Earlier this year, we reviewed and updated the Board charter to reflect the evolving discussion around Board governance in Australia as well as other key policies in relation to privacy, whistleblowing, sustainability and modern slavery. Managing risk The Board recognises the importance of building and fostering a culture of accountability, and every individual takes responsibility for risks and controls in their area of authority. We have focused on building risk-awareness capabilities including, compulsory training for all employees so we can work together to recognise risks before they threaten our business, know how to deal with risk when it does arise, and learn and become stronger from any impact. To support our ongoing commitment to managing risk, we have changed our governance focus to reflect recent regulatory and market changes. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t With this in mind, we recently appointed Karen Lonergan as our Group Executive, People and Culture, to extend the work we commenced following the culture review we undertook last year. Fostering innovation We are actively encouraging and supporting all employees to innovate, from improving customer experiences to developing new products. In FY19 we made good progress, with the launch of LAB-52 and the Stockland Accelerator, powered by BlueChilli. I was proud to sponsor the Chairman’s Awards for Innovation this year, which had over 28 entries. The awards provide an opportunity for employees to demonstrate how they have successfully developed a solution to a customer problem, created a new product or found better ways of working. I was impressed by the scope and sophistication of the entries this year, each of them showing a real passion for delivering new value to our business. We are trialling the delivery of pre-fabricated townhome product at a number of our communities. We have also identified opportunities in our existing portfolio for land lease communities, designed to attract over 55s, where the occupant owns the dwelling and enters a lease for the land. Distribution and outlook As forecast, our full year distribution was 27.6 cents per security, representing a payout ratio of 74 per cent of funds from operations. We forecast flat growth in FFO per security in FY20, noting that market conditions remain variable and we are cautious about the pace of recovery in the residential market. Distributions per security growth will also be flat, and our distribution payout will be at the bottom end of our 75-85 per cent target ratio. Conclusion Thank you to my Board colleagues, the executive team and every one of our employees for their ongoing commitment to excellence. Whenever I visit a Stockland community, asset or town centre, I feel proud of what we are creating and delivering for Australians, and I’m confident we have the right strategy in place to continue to deliver value for our securityholders. Thank you for your continued support. Tom Pockett Chairman Our governance framework consists of three lines of defence: 1. All employees take responsibility for managing risk 2. A Group Risk function monitors the operational environment and adapts our approach accordingly 3. We conduct regular independent risk assessments. Throughout the year, regularly meeting with major investors has given us the opportunity to hear their concerns and this feedback has been invaluable in updating our governance framework. Our changing world Climate change remains a key concern for Australians, and we continue to design our communities and invest in asset upgrades to improve our resilience. During the January 2019 Townsville floods, our local employees worked tirelessly to help keep their community safe. They were able to apply our Cyclone Management protocols, that clearly set out a process for proactive management of the crisis, and I’m extremely proud the team won the award for “Most Effective Recovery” at the Business Continuity Institute Australasian Awards, and is now shortlisted in the global award for the same category. We continue to set the benchmark for sustainable development and once again this year we were recognised as the most sustainable real estate group in the world in the 2018-2019 Dow Jones Sustainability Index. We were also named by GRESB as the Global Sector Leader for listed companies in the category Diversified – Retail/Office. Stockland is the only Australian company to have achieved CDP (the non-profit global environmental disclosure platform) Climate A-List status every year since 2016 and this year we were the only Australian property company on the Climate A-List. Diversity and inclusion Last year we achieved a significant milestone, becoming one of the few companies to achieve gender balance as defined by the Workplace Gender Equality Agency (WGEA) across our workforce, at all levels of management. For the fifth consecutive year, Stockland was named as an Employer of Choice for Gender Equality for 2018-19; we were a 2018 national finalist in the Property Council Australia Diversity Excellence awards; and were recognised as a WGEA Pay Equity Ambassador, having succeeded in narrowing the pay gap to a ratio of 98.5 per cent for like roles. Culture: valuing our people Our employee survey once again showed extremely high employee engagement at 81 per cent, confirming the positive morale, customer focus and sense of care that we are well-known for. A particular focus this year is on strengthening our culture, by leveraging the strengths of our people across our diverse teams, and ensuring we are working effectively and efficiently together to deliver on our purpose of creating a better way to live. 6 Year ended 30 June 2019 7 Stockland Annual Report 2019Securityholder information and key datesGlossary Letter from the Managing Director and CEO Dear Securityholders, I am pleased to report that our diversified business has helped us deliver good results in line with expectations despite a more challenging year in FY19. We continue to deliver on our strategic priorities to improve the quality of our portfolio, upweight workplace and logistics, reposition our leading town centres around convenience and experience, and expand capital partnering. We’ve also achieved good momentum with our planned retail divestment program with $505 million divested, exceeding our initial target of $400 million. We have extended our position as the leading creator of sustainable communities in Australia, and despite the challenging residential market, we have realised higher margins and continued to gain market share over the year, as customers focus on the strength of our brand which is built on the quality and liveability of our communities. In line with our strategy, we have finalised a 50 per cent capital partnership for our Aura community on the Sunshine Coast, at a 30 per cent premium to book value, with Capital Property Group, a highly regarded partner. We continue to recycle capital into our workplace and logistics development pipeline and re-stock our residential landbank to position us for the future. We have also completed $192 million of our $350 million buy-back of Stockland securities to help support the resilience of securityholder returns into the future. Delivering returns, positioning for the future Funds from operations (FFO) for the group was $897 million for the FY19 period, up 4.0 per cent on FY18 and representing growth in FFO per security of 5.1 per cent, in line with expectations. This reflects a strong performance in our residential and workplace and logistics businesses. Net tangible assets (NTA) per security was down 3.3 per cent from 30 June 2018 to $4.04, primarily due to negative retail town centre and retirement living valuations and non-cash mark-to-market on our derivatives. Our Communities business has performed well, with Residential delivering strong operating profit, up 8 per cent on FY18. In FY19 we have achieved almost 5,900 residential settlements, with 85 per cent of our buyers being owner occupiers which is the strongest demand segment. There has been some improvement in the market since the federal election in May this year, however access to credit remains challenging for many of our customers. Our Retirement Living FFO was up 5.7 per cent this year to $56 million, achieved through disciplined execution of our strategy which has seen solid sales and profit generation in our new development projects. Improving the quality of our retirement living portfolio remains a focus. We sold three non-core villages at around book value for approximately $60 million earlier this year, and we continue to leverage our existing landbank to drive growth through development, with our development settlements up 53 per cent from FY18. We have also continued discussions to introduce a capital partner to this business. Our residents are our priority and I’m pleased that we’ve maintained strong customer satisfaction levels, with the highest level of resident happiness since 2009 at 8.6 out of 10. We continue to reshape our Commercial Property business for success. The business delivered comparable FFO growth up 2.1 per cent across the portfolio, at the lower end of our forecast, with the high-performing workplace and logistics markets partially offsetting the weaker retail sector. While our retail portfolio has experienced negative rental reversions associated with remixing around experience and convenience, our comparable MAT growth per square metre came in at 2.3 per cent, and core portfolio FFO growth was positive. Our portfolio improvement strategy is well underway. We have continued to actively reposition the retail town centre portfolio to respond to ongoing changes in customer spending habits, remixing tenancies to add growth businesses, rebasing existing rents to ensure I am also pleased to confirm our continued support of the United Nations Global Compact with whom we partner to promote responsible business practices and sustainable development. Central to everything we do is our people. Our employee engagement score of 81 per cent is four points above the Australian National Norm, and I’m extremely proud that we have now achieved gender balance (as defined by WGEA) across our workforce and all levels of management and the Board. Outlook Current market conditions remain mixed, with steady employment growth, record low interest rates, recent tax cuts and high investment in infrastructure, but broad uncertainty driven by reduced credit availability, weak consumer sentiment and low wages growth. We expect Retail FFO to stabilise through FY20, with growth forecast from FY21, as our remixing and placemaking initiatives enable us to adapt to the structural changes in the retail sector. We expect continued growth from our workplace and logistics portfolio from rental growth and new developments. Despite an improvement in residential enquiry and the market bottoming, we expect the market to take some time to normalise as customers continue to experience challenges achieving loan approvals. In FY20, we expect to deliver over 5,000 residential settlements. Retirement living FFO is forecast to grow moderately given improving market conditions, our quality service offering and new development projects. We remain focused on creating Australia’s most liveable and sustainable communities, owning and managing leading retail town centres in strong trade areas and growing our workplace and logistics portfolio. My sincere thanks to all of you, our securityholders, and to our customers, communities and all of our employees. Mark Steinert Managing Director and CEO I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t sustainable occupancy costs, upgrading centre amenity and divesting non-core centres. Retail town centre devaluations totalled $474 million for the year. Thirty-five per cent of the devaluations were driven by capitalisation rate expansion. About half were driven by the softening of growth rates, and changes to rental income and capital cost re-forecasting, following the implementation of our strategy to remix tenancies and renew some leases at more sustainable levels. The remainder was driven by increased land taxes and rates. We continue to invest in our Workplace and Logistics portfolio and it performed very well over the period, delivering comparable FFO growth of 10.4 per cent in Workplace and 3.9 per cent in Logistics. We maintained occupancy around 96 per cent. Our logistics business has a clear growth strategy, and we secured 294 hectares of industrial land, including Melbourne Business Park in Truganina in Melbourne’s west, and Gregory Hills in Camden in Sydney’s west, during the year. Our forward development pipeline for this business is valued at over $1 billion. We are progressing development opportunities for our Sydney workplace assets, including Stockland Piccadilly in the CBD and 110 Walker Street in North Sydney, which are well-located for future workplace and mixed use development. Financial & capital management We have maintained a focus on disciplined and active capital management for this part of the cycle, and we’ve sustained a robust balance sheet. We have held our A-/Stable credit rating from Standard and Poor’s for 18 consecutive years and we also hold an A3/Stable credit rating from Moody’s, which was obtained in August 2017. Operational excellence Anticipating future demands, whether that’s from regulatory requirements or customer trends, is critical to the success of our business. By fostering innovation we are positioned to win new customers and continue delivering communities that help create a better way to live. Our partnership with BlueChilli for the Accelerator program has seen 10 property tech start-ups develop their ideas into commercial products – all of which will have the potential for positive impacts across many areas of our business. We will continue to prioritise and invest in building innovation capabilities and skills within our organisation through continuous improvement and via LAB-52, our innovation engine, as we anticipate and respond to global mega trends and changing customer expectations. We are proud to be a global sustainability leader. Since 2006 we have halved our carbon intensity, invested over $33 million in solar power generation across 20 retail and logistics centres, and saved over $106 million through energy efficiency innovations. 8 Year ended 30 June 2019 9 Stockland Annual Report 2019Securityholder information and key datesGlossary Our business Stockland is one of the largest diversified property groups in Australia with $15.2 billion of real estate assets including retail town centres, workplace and logistics assets, residential and retirement living communities. Residential communities 56 Retail Town Centres 35 Retirement Living villages 62 Workplace & logistics assets 34 How we operate Australian based Board 1,463 employees 84 families move into our residential communities every week 400,000+ shoppers visit our Retail Town Centres every day 11,000+ residents live in our retirement communities 3,000 Commercial Property tenants How we make a difference We make a worthwhile contribution to communities across the country by creating leading residential and retirement communities, retail town centres and workplace and logistics assets. Our structure We are a listed company on the Australian Securities Exchange. To optimise value to our securityholders we are structured as a stapled security, a combination of a unit in Stockland Trust and a share in Stockland Corporation. This allows us to efficiently undertake property investment, property management and property development activities. Our values The Stockland CARE values were developed by our people and guide our actions. Community Accountability Respect Excellence I n t r o d u c t i o n Our point of difference is community creation Our annual Liveability Index Survey measures what matters to our residents, so we can design our communities based on what they tell us is important. The Liveability Index Survey invites feedback on all aspects of the community – from quality of built and natural environments, to how its design supports mental and physical wellbeing. Years of listening to feedback from our residents has helped us shape some of Australia’s most liveable communities, with 93 per cent resident satisfaction across our communities. Liveability score 74% Liveability is being able to connect with the community, feeling safe where I live and enjoying the open spaces with my family and friends. Cathy Stevenson Willowdale Community 10 11 Year ended 30 June 2019Stockland Annual Report 2019Strategy and performanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Our strategy We have a clear strategy to deliver sustainable and growing returns Our strategy is to maximise returns by developing sustainable communities, owning and managing leading retail town centres, and growing our workplace and logistics asset base in Sydney, Melbourne and Brisbane. We achieve this by focusing on our three enduring pillars; grow asset returns, capital strength and operational excellence. p e r f o r m a n c e S t r a t e g y a n d Grow asset returns Drive returns in our core businesses by creating liveable, affordable and connected communities, future proofing our retail town centres and retirement villages, and growing our workplace and logistics portfolio. Capital strength Actively manage our balance sheet to maintain diverse funding sources and efficient cost of capital. PE THRIVIN G MUNITIES A H S M O C C S A T P R I E T N A L G T H GROW ASSET RETURNS Maximise returns through community creation ENRICH OU R VALUE CHAI N & O I P N T N I M O I V S A E T E L A N E C N OPERATIO EXCELLE Operational excellence Improve the way we operate to drive efficiencies, compliance, sustainability and employee engagement. Our strategic pillars are strengthened by our focus on sustainability, which ensures we have a long-term view of our business and consider all our stakeholders’ needs. You can read more about our sustainability approach on page 52. Underpinning these pillars are a range of strategic priorities we are focused on to achieve our goal of maximising sustainable and growing returns. 1 2 3 4 Accelerate improvement in the quality of our Retail Town Centre portfolio Increase Workplace and Logistics weighting Enhance our capability to drive growth opportunities Broaden capital partnering initiatives across all sectors 12 FUTURE PROOFING OUR RETAIL TOWN CENTRES Shopping centres are a destination and the success of our retail portfolio is based on creating vibrant spaces that are at the heart of the community. At Stockland Burleigh Heads we used customer insights to remix the tenant offering, introducing new food offerings in a vibrant outdoor living space, as well as local artist murals and dog parking. Retailers who were tenants before the improvements have experienced a 47 per cent uplift in sales and these simple activities have resulted in specialty sales growth of 4.4 per cent. Stockland Burleigh Heads, QLD 13 Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Grow our asset returns Communities RESIDENTIAL The Residential business delivered a strong operating profit result in FY19, up 8.0 per cent on the prior year despite a challenging housing market. We achieved 5,878 settlements for the year and our market share increased by three per cent to 15 per cent. We remain well positioned in the deepest part of the lending market, with over 85 per cent of our product sold to owner-occupiers, and we are still seeing strong demand for house and land packages in affordable, liveable communities. During the period, operating profit margin increased to 19.9 per cent as a result of higher priced Sydney and Melbourne settlements. Over the course of the year we made good progress building our townhomes business to broaden our customer reach, with 470 settlements recorded and 447 contracts on hand for future year settlements. We expect continued growth from townhomes in FY20, as we further develop this product both within our Communities landbank and on stand-alone sites. Our strong brand and reputation for quality, liveable communities underpinned our results in FY19 as customers looked to purchase from established companies they can trust. Our scale enables us to understand what our customers want and deliver this at a lower cost. This has been critical in achieving good sales in a weaker environment. The size, quality and diversity of our landbank remains one of our key strengths and during the year we restocked our pipeline with acquisitions at Altona North and Kalkallo in Melbourne. We continue to focus on targeted acquisitions in key growth corridors connected to jobs, transport and schools. We have seen some improvement in the market since the federal election in May, with enquiry up over 50 per cent in Sydney and Melbourne. Whilst access to credit remains challenging for many of our customers, we expect sales volumes to improve over the course of the next 12 months and with 3,869 contracts on hand, we are starting FY20 in a good position. Strategic priorities 1 2 3 Optimise and grow our landbank Broaden our customer reach Enhance customer experience and resident liveability I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y OUR COMPETITIVE ADVANTAGE RESIDENTIAL SNAPSHOT Brand Built around the creation of highly liveable and sustainable communities. Scale Enables us to understand customer needs and deliver at a lower cost. Landbank Skewed towards rail serviced corridors in Sydney, Melbourne and South East Queensland. Operating profit $362m Up 8.0% on FY18 Operating profit margin 19.9% Up from 18.3% in FY18 Return on assets 18.7% Lots settled 5,878 Contracts on hand 3,869 At 30 June 2019 Willowdale, NSW Owner occupiers 85% 14 15 Year ended 30 June 2019Stockland Annual Report 2019 RETIREMENT LIVING Cardinal Freeman, NSW FFO in our Retirement Living business was up 5.7 per cent in FY19, at $56 million, driven by a 53 per cent increase in development settlements and non-core asset sales. Our established village sales stabilised in the second half of FY19 through challenging market conditions. In FY19 we continued to improve our customer offering through simpler contracts, improved services and investment in our villages. Providing more certainty for our residents through changes to our contracts is resonating well with customers. Over 80 per cent of customers chose the Peace of Mind contract option in FY19, which provides customers with a known exit value. Resident satisfaction levels were over 85 per cent in FY19. This strong result is testament to the customer experience our employees provide to residents and our continued investment in improving our villages. Strategic priorities We continued to differentiate the customer experience by providing our residents with access to a range of services and resident care through our Benefits Plus program, which we have now implemented nationally. We also have government approved home care providers offering services such as meals, mobility aids and lifestyle products such as travel. In FY19, three non-core villages were sold at around book value for approximately $60 million, as we focus on optimisation of the portfolio and improving overall returns. We are continuing our discussions to introduce a capital partner to the business in order to broaden our capital base and provide a platform for future growth. There are currently 280 units under construction and 20 retirement living sites in our development pipeline, including 10 identified land lease communities. 1 2 3 Improve quality of portfolio Increase returns through development pipeline and capability Enhance customer experience and satisfaction p e r f o r m a n c e S t r a t e g y a n d RETIREMENT SNAPSHOT FFO profit $56m Up 5.7% on FY18 Development units settled 250 Up 53% on FY18 Cash return on assets 4.5% Occupancy 93.3% 16 17 Birtinya retirement village, QLD Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Commercial Property RETAIL TOWN CENTRES Stockland Balgowlah, NSW In FY19 comparable FFO growth for our retail town centres was down 0.2 per cent for the year, however we made good progress on our portfolio improvement strategy and had high occupancy of over 99 per cent. We delivered comparable MAT growth of 2.3 per cent and comparable specialty sales MAT growth of 1.8 per cent. MAT comparable specialty sales per square metre on an adjusted moving lettable area basis, rose by 2.5 per cent to $9,251. This was driven primarily by growth in health and wellbeing services, mobile phones and food retail. Our centres remain focused on providing convenient, everyday shopping for our communities with non- discretionary spend making up around 70 per cent of our total sales. In FY19 we have refined our retail strategy to accelerate the improvement in the quality of our portfolio, underpinned by our drivers of community, convenience and the curation of retail mix and experiences. We also conducted a disciplined review of our assets and have redefined the core and non-core retail town centre portfolio. Core centres have limited competition, above average population growth, strong employment fundamentals and the ability to evolve to meet future customer needs. We divested $5051 million of retail centres putting us ahead of schedule to exceed our $400 million target of non-core retail divestments ahead of the anticipated timeframe. The retail town centre development pipeline has been reduced by around 50 per cent, with a focus on smaller placemaking projects which will redefine customer experience and convenience. We have continued to make good progress in remixing our centres, increasing exposure to the growth categories of Food and Services while reducing our offering of Apparel and Jewellery. This reweighting not only improves our centres’ resilience to online retail, but also achieves stronger rent per square metre, with our average Food & Services rent 30 per cent above Apparel and Jewellery. 1 Including exchanged and settled assets from 1 July 2018 to 21 August 2019. Strategic priorities 1 2 3 Accelerate improvement in the quality of our Retail Town Centre Portfolio Deliver on customer value proposition: Community, Curated and Convenience Drive strategic capital partnering initiatives Stockland Birtinya, QLD Our customer value proposition Community Deep consumer insights inform our strategy at each centre to meaningfully connect to our existing customers whilst driving new visitation, through a diverse range of initiatives that may include events, classes, markets, communication, social media, pop-up retail and play. Curated Looking at our current mix and areas of escape expenditure we capture a variety of retail initiatives, new ways of driving income and leveraging mixed-use to transform our assets into true town centres whilst creating leading destinations. Convenience Ensuring the journey of our shopper is ‘easy’ from parking the car to using the amenities and being able to navigate through our centre to achieve shopping and entertainment needs. Community “relevant” Convenience “easy” Curated “experience” I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y RETAIL TOWN CENTRES SNAPSHOT FFO $432m Up 1.1% on FY18 Comparable FFO growth (0.2)% Comparable specialty sales growth 2.5% Adjusted lettable area Portfolio comparable MAT growth 2.3% Occupancy 99.3% 18 19 Year ended 30 June 2019Stockland Annual Report 2019 WORKPLACE AND LOGISTICS Ingleburn Logistics Park, NSW We continue to invest in our workplace portfolio and it performed very well over the period, delivering comparable FFO growth of 10.4 per cent with occupancy of 94.7 per cent. The logistics market continues to be supported by ongoing investment in infrastructure supply chain enhancements and the growth in online retail and we are actively investing in our logistics development pipeline, primarily leveraging our existing landbank. Over the year we completed developments at Willawong, Ingleburn and Yennora, to the value of $99 million. Our logistics portfolio value increased by 13.9 per cent to over $2.5 billion and delivered comparable FFO growth of 3.9 per cent. We acquired 13 hectares of industrial land at Gregory Hills in Australia’s fastest growing Local Government Area, Camden, in Sydney’s west. Melbourne Business Park remains a key logistics development project, with a Stage 1 DA for an 87 hectare planned subdivision lodged with Melton City Council in June 2019. Our forward development pipeline for the Workplace and Logistics business is valued at over $2 billion. We are progressing development planning for our Sydney office and business park asset opportunities, including Stockland Piccadilly, 110 Walker Street in North Sydney and M_Park Business Campus in North Ryde. Strategic priorities 1 2 Grow and develop a market leading portfolio to greater than 25 per cent of total assets, through delivery of development pipeline on land we control Optimise the returns of our workplace portfolio, focusing on Sydney p e r f o r m a n c e S t r a t e g y a n d WORKPLACE AND LOGISTICS SNAPSHOT Logistics FFO $164m Comparable growth of 3.9% on FY18 Workplace FFO $48m Comparable growth of 10.4% on FY18 Occupancy 96.5% Completed developments $99m Development pipeline >$2bn 20 21 Triniti Business Park, NSW Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Capital strength S&P credit rating A-/Stable Moody’s credit rating A3/Stable Gearing 26.7% Within target range of 20% – 30% Weighted average cost of debt 4.4% Weighted average debt maturity 5.8 years Distribution payout ratio 74% Balance sheet $m Cash Real estate related assets • Commercial property • Residential • Retirement living • Other Retirement Living Gross-Up Other financial assets Other assets Borrowing Retirement living resident obligations Other financial liabilities Other liabilities Securities on issue NTA per security 30 June 2018 30 June 2019 333 10,562 3,432 1,443 37 2,724 294 272 3,938 2,741 196 2,040 140 10,323 3,411 1,452 36 2,585 534 325 4,704 2,597 220 1,650 Change -57.9% -2.3% -0.6% 0.6% -2.2% -5.1% 81.4% 20.4% 19.5% -5.3% 12.2% -19.0% 2,434,469,276 2,384,351,503 4.18 4.04 -3.3% Stockland has a prudent approach to capital management, which provides us with the flexibility to strategically allocate capital across our diversified portfolio, in response to changing market cycles. Our strong balance sheet and capital management position underpins our investment grade credit ratings of A-/Stable (S&P) and A3/Stable (Moody’s), and enables us to continue diversifying our funding sources across global capital markets on competitive terms and tenors. We continue to actively manage our debt portfolio, which has seen weighted average cost of debt decline from 5.2 per cent in FY18 to 4.4 per cent in FY19. Our weighted average debt maturity is within our target range at 5.8 years. During the period, we secured new long-term debt totalling A$551 million across both the Australian and US capital markets at attractive prices and long tenors. As part of our disciplined approach to managing capital, we initiated a securities buy-back program of up to $350 million, completing $192 million, and representing 50.1 million shares at an average discount NTA of 8.3 per cent1. Our gearing level is 26.7 per cent and we expect to remain within our target range of 20 to 30 per cent in the medium term as we continue to execute on our strategic priorities. TARGETS Strategic capital partnering across all sectors 70:30 Recurring/trading assets >10% Group return on equity Capital allocation We closely manage our capital to ensure we have the optimal allocation across our diversified portfolio. Over the past 12 months, we have decreased our weighting to Retail Town Centres by 5 per cent and increased our weighting to Workplace and Logistics by 4 per cent. Our current allocation of 23 per cent means we are on track to meet our target exposure of 25 to 35 per cent in this category in line with our strategy. 1 Based on NTA at 30 June 2018 and 31 December 2018 of $4.18 and $4.19 respectively. PORTFOLIO ALLOCATION Communities Workplace & Logistics Retail Town Centres Capital allocation at 30 June 2019 32% 23% 45% Target capital allocation 20-30% 25-35% 40-45% I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 22 23 Year ended 30 June 2019Stockland Annual Report 2019 To drive growth in our business and deliver on our strategic priorities, we are actively progressing capital partnering opportunities across all sectors p e r f o r m a n c e S t r a t e g y a n d Updated debt documentation Over the period we renegotiated our debt documentation, updating a number of key terms and conditions to be consistent with the market and our peers. As a result, the Total Liability to Total Tangible Assets covenant has been replaced by Financial Indebtedness to Total Tangible Assets, and the limit increased to 50 per cent (from 45 per cent) across all markets making up our total debt portfolio. Revaluations We have taken a prudent approach to revaluing our Commercial Property assets, completing independent revaluations on 98 per cent of our portfolio by value over the last twelve months, and 77 per cent at 30 June 2019, resulting in an overall net valuation decrement of $199 million for the full year. This included a $275 million uplift for our workplace and logistics portfolio, and a $474 million decline in retail town centre valuations. Thirty-five per cent of the retail devaluations were driven by capitalisation rate expansion. About half were driven by the softening of growth rates, and changes to rental income and capital cost re-forecasting, following the implementation of our strategy to remix tenancies and renew some leases at more sustainable levels. The remainder was driven by increased land taxes and rates. We have deliberately focused on changing the tenant mix in our retail town centres away from apparel and towards services, lifestyle, health, dining and entertainment categories, where we see the greatest potential growth in the future. Capital partnering Capital partnerships help strengthen our balance sheet and enable us to invest in growth opportunities across our diversified portfolio, including our workplace and logistics development pipeline and additional residential community acquisitions. Post period end, in July 2019, we announced a strategic capital partnership in our residential portfolio, with Capital Property Group (CPG) investing a 50 per cent interest in our largest masterplanned community, Aura on the Sunshine Coast at a 30 per cent premium to book value. We are executing on a clear strategy to bring in capital partners to invest alongside us to deliver large-scale projects. Distributions The dividend and distribution payable for the year ended 30 June 2019, is 27.6 cents per security, up 4.2 per cent on FY18. The payout ratio is around the lower end of our target range and in line with FFO growth. This allows us to both provide capital to the business for further growth and ensures that our distributions remain closely linked to the movements in FFO growth. AURA PARTNERSHIP In July 2019, we entered into a strategic capital partnership with Capital Property Group (CPG) investing a 50 per cent interest in Aura, one of the largest masterplanned communities in Australia, with an end value of $5 billion. CPG will invest alongside us to continue the creation of an outstanding new city on the Sunshine Coast, combining affordable homes, retail town centres and business parks alongside best-in- class schools, child care, sporting facilities, transport, open space and community infrastructure. This capital partnership gives us additional flexibility to invest in other counter-cyclical residential opportunities, as we focus on re-stocking our national pipeline. Distribution per security 27.6c Up 4.2% on FY18 24 Aura, QLD 25 Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary p e r f o r m a n c e S t r a t e g y a n d Operational excellence To deliver on our strategy we need to continually improve the way we operate to drive efficiencies and manage risk and opportunities effectively over the long-term. Efficiencies Innovation Improving systems and technology We continued to focus on improving our technology and systems in FY19 with the further roll-out of our Core Systems Program and a Digital Technology uplift. The introduction of Digital Customer Case Management in the Core Salesforce system, along with new website features and social media tools, have improved our overall customer engagement and responsiveness. New SAP financial consolidation and reporting tools were also implemented. The Core Systems Program continues to progressively release software that increases business efficiency and our ability to respond to digital opportunities. Continued technology improvements are supporting productivity and the flexibility required in a modern workplace. Managing costs In FY19 we have reduced unallocated corporate overheads by $5 million, with additional savings forecast and a commitment to further reducing our cost base in FY20. One of the major challenges and opportunities facing all large corporations is the rate of innovation and its ability to disrupt growth. We are responding to this challenge and investing in building the right innovation capabilities and skills within our organisation. In 2019 we launched LAB-52, Stockland’s innovation engine named after our founding year. LAB-52 provides a collection of tools and processes that enable us to identify, assess and ultimately deliver value for our customers and securityholders. In 2019 we reviewed 53 ideas submitted and saw the outcomes of another 40+ initiatives shared via the LAB-52 portal. In addition to supporting employee innovation, we have also invested in external ideas and partnerships. The Stockland Accelerator, powered by BlueChilli, is a program that identifies, validates, and builds new PropTech start-ups that can transform our industry and create better connected communities. Of over 240 applications received, 10 start-ups were selected for the program, with concepts ranging from AI-powered indoor farms to a chatbot to streamline facilities requests. Many of our participating start-ups now have live pilots, improving the experience of customers across the business. STOCKLAND ACCELERATOR – POD FARMS The concept for POD Farms came as renewables expert Christian Collison contemplated how to turn excess solar power into a new product. Inspired by his love of fresh food and nutrition, Christian devised a method for successful small-space indoor farming. His test lab grew micro-greens and leafy greens for a year before POD Farms was accepted into the Stockland Accelerator, powered by BlueChilli. Now, POD Farms incorporates AI systems to optimise yields, reduce power and water, and provides remote control for modern urban farmers – and transforms under-utilised spaces in commercial and industrial assets into productive, revenue-generating farms. Christian is currently preparing to pilot his first commercial facility with Stockland. POD Farms founder Christian Collison, sharing his vision at the Stockland Accelerator Investor Showcase evening. 26 27 Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Employee engagement 81% Target 80% Women in management 45.8% Maintain 40/40/20 ratio in FY20 Our people who work flexibly 83.2% Target 80% Gender pay equity 98.5% Target 100% Lost time injury frequency rate 3.2 Our people The ability to engage and retain our employees is critical to our overall business performance. Every year we conduct an externally-facilitated employee survey called Our Voice to measure employee engagement along with our key strengths and opportunities for improvement. We continued to outperform the Australian National Norm for employee engagement in FY19 with a score of 81 per cent and we have been recognised as an employer of choice in the Australian workplace by the Workplace Gender Equality Agency (WGEA) for the fifth consecutive year. Strengthening Stockland We are a purpose-driven organisation with a strong culture. It is important we continue to build on this robust foundation and position our organisation to respond to challenges and opportunities in the future. In FY19 we conducted a culture review to understand the elements of our culture we need to improve, and the support we need to provide employees to deliver on our strategy. Out of this work we have developed an integrated program of work across leadership, structure, capability, processes and systems. The program, called ‘Strengthening Stockland’, will assist the business to build on our foundation of collegiality, care, and passion to drive greater innovation, accountability, and faster decision-making. Health, wellbeing and safety We foster a culture where health, safety and wellbeing are core values and continuous improvement of our safety performance is part of our normal business practice. We know stress and anxiety significantly impact job performance, employee satisfaction and retention. In FY19 we developed the ‘Ways to Wellbeing’ course in consultation with the Wellbeing Outfit, to provide employees with a neuro-scientific understanding of stress and wellbeing. More than 500 employees, including Executives and General Managers, have completed the training since it was launched. Our wellbeing score (as measured in the annual employee Our Voice survey) was 75 per cent in FY19, which is consistent with our FY18 score and three points above Willis Towers Watson’s Australian National Norm. Although our lost time injury frequency rate (LTIFR) increased slightly this year from record lows in previous years, we continue to report a low average lost day rate, and we have initiated a number of actions to identify and address the underlying drivers of the increase. Diversity and inclusion We know that we can best respond to our customers’ needs when our people reflect the diversity of the communities we service and when their different views and perspectives are valued. Our Employee Advocacy Groups (EAGs) play an important role in creating an inclusive workplace and developing initiatives to drive diversity. Led by a diverse group of employees across Australia, our four EAGs are Gender Equity, Flexibility, LGBTI+ and Wellbeing, and Accessibility & Cultural Inclusion. In FY19 more than 550 employees completed a LGBTI+ inclusion online training module or face-to-face program. We also continued to focus on supporting flexibility through the One Simple Thing program, improving parental leave return rates and supporting gender diversity through the Senior Women’s Sponsorship Program. Gender equality Stockland actively encourages gender diversity at all levels within the organisation. Gender diversity targets are set by management and regularly reviewed and endorsed by the Human Resources Committee and the Board. In 2018, we achieved a significant milestone in that every level of leadership from Manager through to our Executive Committee and Board had at least 40 per cent female representation. Stockland is one of the few companies that has achieved a gender-balanced workforce (40/40/20) across all levels of management, inline with industry best practice. Our Gender Pay equity ratio is 98.5 per cent and we will continue to focus on closing this gap between male and female fixed pay for all like for like roles. In acknowledgement of our focus on gender equity, we have been recognised by the Workplace Gender Equity Agency as an Employer of Choice for Gender Equality for the past five years and our Managing Director and CEO is a founding member of the Property Male Champions of Change group, which focuses on industry-wide improvements in gender equality. More detail can be found in our Employee Engagement, Development, Diversity and Inclusion Deep Dive, available online at www.stockland.com.au/sustainability/downloads. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 28 29 Year ended 30 June 2019Stockland Annual Report 2019 Customer focus Listening to our customers and delivering initiatives that respond to their needs is critical to the success of our business and our reputation. In October 2018, we launched our new Customer Promise, providing clarity on what it means for our employees to be “Customer Crusaders”. The Promise encourages all employees to consider our commitment to customers when making everyday business decisions and a range of actions has been developed to deliver on our Promise. Proprietary customer research, satisfaction and liveability surveys are used to measure our customer performance and help inform our projects and shape better communities, town centres and workplaces. Stockland Exchange is our own online customer research community made up of shoppers, residents and prospective residents aged from 18 to over 90 years old. In FY19 Stockland Exchange grew to over 6,000 members and was used to better understand our customer attitudes and needs on 40 occasions. In FY19 we exceeded our target of 80 per cent satisfaction with prospective residents in our residential communities and we achieved the highest level of retirement living resident happiness since 2009 (8.6 out of 10). This positive increase in retiree satisfaction was driven by satisfaction with residents’ home and social life. In Commercial Property, we exceeded retailer satisfaction targets with satisfaction at 82.5 per cent and we achieved 84 per cent satisfaction in Workplace and Logistics. These results reflect our increased focus on improving the optimal leasing experience for smaller retailers and the introduction of a new program called ‘Stockland Listens’ to ensure we spend more time understanding our tenants’ needs. ‘Stockland Listens’ is also used in our Communities business to actively seek direct feedback from customers in sessions attended by a range of employees to drive a customer-centric culture and understanding. More detail about our customer targets and initiatives can be found in our Customer Engagement & Experience Deep Dive, available online at www.stockland.com.au/sustainability/downloads. Mernda Retirement Village, VIC p e r f o r m a n c e S t r a t e g y a n d Residential communities resident satisfaction 93% Retirement living resident happiness 8.6/10 Target 8.25 Retail tenant satisfaction 82.5% Target 75% Workplace and logistics tenant satisfaction 84% Target 80% Retail customer satisfaction 80% Target 80% 30 31 Year ended 30 June 2019Stockland Annual Report 2019IntroductionBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Business risks and our materiality process B u s i n e s s r i s k s a n d m a t e r i a l i t y 33 Stockland Merrylands, NSW 32 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Business risks We adopt a rigorous approach to understanding and proactively managing the material risks and opportunities we face. Risks and opportunities We recognise that making business decisions which involve calculated risks, and managing these risks within sensible tolerances is fundamental to creating long-term value for securityholders and meeting the expectations of Stockland’s stakeholders. Stockland’s risk appetite is the degree to which we are prepared to accept risk in pursuit of our strategic priorities. The Board has determined that Stockland will maintain a balanced risk profile so that we remain a sustainable business and an attractive investment proposition, in both the short and long terms. As part of our approach to integrated reporting, Stockland adopts a rigorous approach to understanding and proactively managing the material risks and opportunities we face in our business. Altrove, NSW Our materiality process Stockland has used the materiality definition from the Integrated Reporting Framework to disclose information about matters that may substantively affect the organisation’s ability to create value over the short, medium, and long term. We identified our FY19 material matters using the following process: 1. Identify We identified draft material matters by capturing internal and external perspectives in line with the principles of AA1000 and GRI G4. This included: • Materiality test capturing internal and external perspectives in line with the principles of AA1000 and GRI G4, including: • Investor research and engagement • Customer feedback and insights • Employee surveys • Political and regulatory developments • Industry engagement and advocacy • Social and mainstream media. • We also undertook an operational and strategic risk assessment. 2. Evaluate and prioritise An integrated reporting materiality workshop was held with members of the Stockland leadership team to review the material matters, identify additional relevant issues, rank issues of greatest significance and prioritise them based on their ability to affect value. The material matters were then mapped in terms of their potential impact on value creation over the short, medium and long term. 3. Outcomes and disclosure The following table discloses the final list of material matters developed and mapped. These have been reviewed and approved by Stockland’s executive team and Board. They have also been assured by Ernst & Young (EY). SHORT TERM – STRATEGY EXECUTION Risk and opportunity How we are responding Ability to deliver on our strategic priorities in challenging market conditions. We will continue to deliver sustainable and growing returns by focusing on: • Accelerating improvement in the quality of our Retail Town Centre portfolio • Broadening our capital partnering initiatives across the whole portfolio • Increasing our weighting in Workplace and Logistics • Enhance our capability to drive growth opportunities. Increased competition and changing market conditions may impact our opportunities for growth. To respond to changing market conditions and competition we will: • Maintain a diversified business model at scale in each sector • Reinvest in our assets to meet changing customer needs including agile redevelopment of our properties to capture value add opportunities • Focus on retaining a strong balance sheet with appropriate gearing • Use diverse funding sources including capital partnering and asset recycling • Concentrate on efficiency and cost management • Maintain a prudent approach to forecasting • Proactively replenish our land and asset pipelines • Maintain discipline and agility in our investment decision making • Include a focus on governance and compliance to provide a stable environment for growth • Use a rigorous whole-of-business approach informed by detailed research to drive our capital allocation process • Support innovative culture to improve our customer experience and identify further growth opportunities. This is being facilitated through our new digital platform LAB-52, which is designed to assess and accelerate investment in potential growth areas. As part of our continued focus on operational efficiency, we continue to drive progress in improving our systems capabilities. We have introduced a new Customer Relationship Management system, Salesforce and the Human Resources system SAP SuccessFactors, which have been effective in enhancing the customer and employee experience. We continue to maintain two-way engagement with employees to enable a smooth transition, as well as find additional ways to provide ongoing systems enhancements and use technology to supplement our risk management processes. To help address affordability we will continue to: • Partner with government and industry to drive solutions including innovative construction processes to lower costs • Provide a broader mix of value for money housing options including house and land packages, completed housing, medium density and apartments • Balance the demand from home owners and investors so that our residential communities remain attractive to future buyers. Systems enhancements impact business process efficiency. Housing affordability continues to impact the dynamics of the Australian Housing market. Extreme weather, security risks and energy price shocks impact business continuity and community resilience. To make our business more resilient we will continue to: • Train our employees and increase their risk awareness including undertaking regular scenario testing • Invest in asset upgrades and adapt community design • Assess and implement wholesale energy strategies and renewable energy installations, to provide alternative sources of energy to mitigate the risk of price shocks • Be vigilant in protecting and managing data threats from cyber attacks • Actively manage our corporate insurance program to provide adequate protection against insurable risks. Ability to dispose of non-core Commercial Property assets. Over the past 12 months we have completed independent valuations of 98 per cent (by value) of the Commercial Property portfolio and adopted a disciplined approach to the disposal program for individual non-core assets in consultation with external agents. We have made good progress to date and are on track to achieve our targets. Change within the retail sector impacts rental growth. Over the past 10 years, the retail landscape has undergone structural change and seen a convergence of technological advances, in particular e-commerce, changes in underlying consumer behaviour, and the entry of new, international retailers. These changes have challenged some of our retailers. We have been proactive and pre-empted many changes. We will continue to: • Focus on experiential retail, health, services and food catering • Apply our ‘placemaking’ strategy across our assets to create convenient, curated communities that form the social hub • Leverage deep customer insights and analytics to inform our tenant re-mixing. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 34 35 Year ended 30 June 2019Stockland Annual Report 2019 SHORT TERM – STRATEGY EXECUTION Risk and opportunity How we are responding Regulatory and policy changes impact our business and customers. Increasing expectations on organisations from the community. We will continue to: • Implement forward-looking practices to remain well positioned for regulatory change. For example, we are amongst the first Australian corporates to disclose our climate-related risks with our financial reporting, and we now provide contract choice to provide more certainty for our Retirement Living residents • Engage with industry and government on policy areas including taxation and planning reform. As part of our commitment to tax transparency and demonstrating good corporate citizenship, we have adopted the Australian Federal Government’s Voluntary Tax Transparency Code, which provides a set of principles and minimum standards to guide medium and large businesses on public disclosure of tax information • Focus our development activity in areas where governments support growth. Standards for interaction with customers have been under intense scrutiny in Australia. It is important that we engage with our customers in an ethical and considered manner. At Stockland we have prioritised our focus on customer engagement including regular customer surveys, extra training for our customer-facing employees, and the implementation of a customer feedback framework with reporting through to our Board and Committees. Retirement living residents have high expectations about value and fairness. We will continue to: • Have an open and respectful relationship with our Retirement Living residents, and continue our commitment to being transparent and up-front about costs associated with living in our retirement villages • Proactively engage with residents to maintain high satisfaction levels and standards of care • Focus on health and wellbeing and our approach to care • Demonstrate industry leadership and work with our peers to lift industry standards • Review product and contract choice to meet changing customer preference. LONGER TERM – CHANGING MARKETPLACE Risk and opportunity How we are responding Anticipating changing customer and community expectations to meet future demand. We will continue to: • Foster a culture of innovation to identify and take advantage of opportunities to leverage movements in stakeholder preferences • Evolve our market-leading product innovation and deepen our customer insights using our proprietary Liveability Index research, Stockland Exchange (our online research community) and other data sources • Create sustainable and liveable communities and assets, resilient to changes in climate • Enhance our design excellence, providing greater functionality and value for money that meet the demands of Australia’s changing demographics, including an ageing population and more socially conscious millennials. Our ability to harness opportunities arising from digital disruption. We will continue to: • Identify, develop and integrate technological enhancements across our business, including online residential and retirement living engagement opportunities Capital market volatility impacts our ability to transact and access suitable capital. Ability to adapt our operating model to meet the changing nature of the workforce. • Support Stockland retail town centres as thriving communities by delivering quality services and spaces that are e-enabled. So that we are able to continue to raise sufficient capital to fund growth, we will continue to: • Focus on retaining a strong balance sheet at appropriate levels of gearing • Maintain and increase access to diverse funding sources across global capital markets • Maintain our prudent capital management policies including a target gearing range of 20 to 30 per cent • Retain favourable investment grade ratings across multiple credit agencies to demonstrate our strong credit value proposition • Regularly update existing and potential debt and equity investors to inform them about the business. The ability to attract, engage and retain our employees is critical. Physical and organisational boundaries are becoming increasingly blurred as new technology enables greater workplace flexibility, including when and where employees work and encouraging creative and adaptive teamwork. We have successfully deployed Office365, Salesforce and SAP SuccessFactors to improve collaboration and flexible working. We are focused on how we actively set employees up for success and will continue to: • Maintain a focus on fostering a positive culture to deliver value to all stakeholders • Encourage flexible work practices supported by our new collaboration platforms • Train our senior leaders to be more agile and resilient through Stockland leadership programs • Provide employees with technology devices that increase their mobility and flexibility and facilitate improved productivity in a balanced way. 36 PARTNERSHIP TO PRODUCE AGEING AND DIGNITY REPORT In 2019 Stockland was pleased to partner with the Committee for Sydney and not-for-profit organisation, Baptistcare to produce the ‘Dignity and Choice’ report which highlighted the challenges in creating an inclusive future for Sydney’s ageing population. We contributed in a number of ways, including hosting a working group to determine the challenges to be answered within the report which included meeting the housing needs of an ageing population, transport to keep people socially connected and healthy, planning principles for inclusive public spaces, healthy and active ageing, fostering social connection and tackling the dementia challenge The report was launched amongst an audience of industry and government representatives and included a keynote address from the Hon. John Sidoti MP, NSW Minister for Sport, Multiculturalism, Seniors and Veterans. Producing reports like the ‘Dignity and Choice’ report helps Stockland to remain on top of the retirement living market, identify challenges and continue to provide high quality, community living for our residents. B u s i n e s s r i s k s a n d m a t e r i a l i t y Stockland Elara, NSW 37 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Climate-related risks r i s k s C l i m a t e - r e l a t e d 39 Whiteman Edge, WA 38 KEEPING IT SIMPLE The aim of this text in ‘Keeping it simple’ boxes is to explain more complex sections in plain English. It also aims to provide explanations and additional disclosures to assist readers’ understanding and interpretation of statements. Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Climate-related Financial Disclosures This is Stockland’s second full-year disclosure of climate change issues management in line with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations were published in 2017 with the objective of developing voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks. Further information on the recommendations is available at www.fsb-tcfd.org. Stockland has long recognised the risks and opportunities presented by climate change, and has responded to these issues by creating and implementing our Climate Change Action Plan (commenced in 2006) and detailed Climate Adaptation Strategy (commenced in 2011). We understand that extreme weather and other physical climate risks impact our assets and communities now, and will continue to do so into the future. We also acknowledge the potential for financial impacts resulting from carbon emissions regulation, particularly in the context of Australia’s ratification of the 2015 Paris Agreement to limit global temperature increases to below 2ºC. We manage these climate risks and opportunities by developing and operating energy-efficient, climate resilient assets and communities; and through our leadership in the transition to lower-carbon energy sources at our assets. Following Stockland’s initial commitment to TCFD in February 2018, we undertook a detailed climate scenario analysis in June 2018. This analysis reviewed the resilience of Stockland’s strategy in relation to the disclosure of our climate-related physical and transition risks and opportunities. It also took into account different climate scenarios in accordance with the TCFD recommendations. The outcomes of this scenario analysis form the basis of our strategy and management of climate-related risks and opportunities, with detail on the governance, strategy, risk management, and metrics, targets and results contained in this section. r i s k s C l i m a t e - r e l a t e d Governance The Board and Board Committees (including the Risk Committee, Audit Committee, Sustainability Committee and Human Resources Committee) provide oversight of our risk management framework. The Risk Committee meets at least four times per year and receives quarterly reports on our enterprise risk register, which includes climate change as a key risk. All directors of the Board are members of the Sustainability Committee, which meets at least twice per year and considers our approach to carbon mitigation (including emissions reduction targets), our methods for building climate and community resilience, and emerging climate regulation. More details on our corporate governance is set out in the section of this report entitled ‘Governance and Remuneration’. Every member of our Executive Committee has specific responsibilities relating to our sustainability performance, including targets and objectives related to climate change risks and opportunities. Our Chief Financial Officer chairs our internal Sustainability Steering Committee, which is composed of senior management from various organisational departments including Strategy and Stakeholder Relations, Project Management and Procurement, Human Resources, Legal, Risk, Operations, Development and Sustainability. The committee meets at least three times per year and its key responsibilities include: • Informing our sustainability strategy and supporting delivery of sustainability targets, including those related to climate change mitigation and adaptation • Investigating and reporting on environmental, social, and governance risks and opportunities across our current and planned operations • Guiding compliance with, and monitoring of, our environmental and social policies, guidelines, and agreed initiatives, including those related to carbon emissions reduction. 40 41 Stockland Wetherill Park, NSW Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Strategy For 13 years, Stockland has been identifying risks and opportunities related to both the physical impacts of climate change (physical risk) and a global transition to lower-carbon energy sources (transition risk). Our response to these risks and opportunities has been guided by our Climate Change Action Plan, our detailed Climate Adaptation Strategy, and our business unit sustainability strategies. We recognise that climate-related risks will persist for the foreseeable future. The precise nature of these risks, however, is uncertain as it depends on complex factors such as policy change, technology development, market forces, and the links between these factors and climatic conditions. To accommodate this uncertainty, we incorporate scenario analysis into our climate risk assessment process to understand how climate-related risks and opportunities may evolve and impact the business over time. In line with the TCFD recommendations, these scenarios were analysed in detail to explore and understand the strategic implications of climate-related risks and opportunities on the resilience of our business. This process provided a useful mechanism for informing stakeholders about how we are positioning ourselves in light of these risks and opportunities. The outcomes of this scenario analysis highlighted specific climate-related issues that could have a material impact on Stockland, relating to both physical and transition risks. Physical risks As an asset owner, manager and developer, we acknowledge that physical risks associated with climate change can result in negative financial impacts, such as increased maintenance costs or decreased revenues from disrupted operations. Our scenario analysis identified key physical risks for Stockland, which include: • Extreme heat – resulting in issues such as increased requirements for cooling and areas of respite, increasing demand on HVAC systems, energy and water supplies, and increased heat stress events amongst the community creating a higher demand for refuge indoors • Extreme rainfall – resulting in issues such as increasing local flood events, roof and gutter leakages and inundation of building and car parks creating property damage and business interruptions • Sea level rise – an increase in salt water intrusion from storm surge resulting in the inundation and degradation of property structures and accessibility • Cyclones and storms – resulting in issues such as decreased roof structure integrity and security of roof mounted equipment creating property damage and business interruptions, and increase in demand for properties to be used as evacuation shelters during cyclone events • Bushfires – resulting in issues such as fire damage to property, accumulation of ash, and smoke penetration into the building envelope resulting in reduced indoor air quality and respiratory system issues amongst customers, tenants and residents. Stockland’s climate scenario analysis informs our climate strategy The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment report (AR5) published in 2014, outlines a range of Representative Concentration Pathways (RCPs) designed to be ‘representative’ of possible future emissions and greenhouse gas (GHG) concentration scenarios to the year 2100. The pathways are based on global research and existing literature and comprise four scenarios: RCP8.5, RCP6.0, RCP4.5 and RCP2.6. Each RCP reflects a different concentration of global GHG emissions reached by 2100, based on assumptions of different combinations of possible future economic, technological, demographic, policy, and institutional trajectories. RCP 8.5 Scenario RCP 2.6 Scenario This scenario is broadly considered the ‘business-as- usual’ scenario in which emissions remain high and global temperatures rise 3.2 – 5.4°C by the end of the century. RCP 8.5 is characterised by increasing GHG emissions driven by a lack of policy changes to reduce emissions. Stockland uses RCP 8.5 for physical risks to inform our scenario analysis. This scenario is most closely aligned with delivering the Paris Agreement targets. It assumes a drastic reduction of global emissions as result of sweeping policy and technology change that results in a global temperature change of approximately 0.9 – 2.3°C by the end of the century, minimising (but not eliminating) physical risks of climate change. Stockland uses RCP 2.6 for transition risks to inform our scenario analysis. Our strategy response to transition risk In recognition of our capacity to contribute to a low-carbon future and to mitigate impacts associated with transition risks, our business has been guided by emission intensity reduction targets and associated strategy since 2006. Executing this strategy prioritises the delivery of energy efficiency enhancements and renewable energy installations across our portfolio, such as our industry leading $32 million commitment to deliver rooftop solar photovoltaic (PV) infrastructure. It also involves engaging our customers, employees and industry stakeholders to educate and advocate for a transition to a low-carbon future. Opportunities related with this strategy include: • potential increased value of existing land holdings resulting from the changing zoning/density requirements • increased premium discounts and the introduction of incentives by the insurance industry • the transition of the grid to renewable energy sources and the opportunity to partner with energy producers to support technological innovation • enhance brand and reputation by educating consumers • the ability to attract capital from organisations seeking to invest in companies helping the transition to a low-carbon economy. Specific detail on how we execute on our strategy and how it relates to our targets and results is described throughout the rest of this section. Our strategy response to physical risks In recognition of these potential impacts, our strategy focuses on a commitment to creating climate resilient assets and communities with a greater ability to endure severe weather impacts and operate with minimal disruption. Implementing this strategy involves our entire value chain, from our development and supply chain through to operations. We use climate and community resilience assessments to understand how to minimise negative impacts and create opportunities from building and maintaining resilient assets for the long term, including community preparedness. Opportunities associated with prioritising the development of resilient assets include decreased operational costs (e.g. maintenance, insurance premiums) and increased revenues from increasing consumer preferences for climate-resilient products. Transition risk We acknowledge that Australia has agreed to the objective of limiting global warming to below 2°C. Pursuing this objective implies a general movement away from fossil fuel energy and increased deployment of low/zero carbon energy sources and energy-efficient technology. Our scenario analysis process informs the business on transition risks for Stockland and how they may evolve over time, including: • Policy changes impacting development and building – including changes in zoning and density requirements, policies promoting sustainable land use and changes to the National Construction Code • Liability – including changes to the insurability of assets and commercial liability regarding disclosure of transition and physical risks • Technology – broad scale changes to the energy and power network including generation, transmission and distribution in the transition to renewable energy sources • Investment – lending institutions only supporting borrowers who manage their climate risk and create low carbon solutions • Reputation – prioritisation of the transition to a low-carbon economy by early adopters. WORKSHOPPING TRANSITION RISK WITH OUR EMPLOYEES The primary purpose of TCFD is to support efforts aligned with the global transition to a low-carbon economy, including limiting global temperature rise to below 2°C. In April 2018, Stockland worked with AECOM to hold a Transition Risk Workshop, engaging key stakeholders across the business to consider what achieving a 2°C future may look for Stockland and for the industry more generally. The outcomes of this workshop formed part of Stockland’s climate scenario analysis, and also shaped our internal “Vision of the Future.” Retaining a future focus with a long-term vision to 2050 is essential. This workshop allowed Stockland employees to really think about the potential outcomes of acting, or not acting, in the transition to a low-carbon economy. Discussions ranged from the opportunities of being an early adopter in terms of meeting investor and consumer demand, through to how Stockland can attract and retain talent as a climate leader, and the challenges and benefits of the energy grid shift. “By 2050 Australia’s energy sector will have undergone widespread and unprecedented transformation... While the scale and pace of change has been intense, it is not without benefit. We can already see that our air is cleaner. Our places and spaces have become greener.” – Excerpt from our Vision of the Future, developed in partnership with AECOM. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 42 43 Year ended 30 June 2019Stockland Annual Report 2019 Risk management Approach Consistent with the adoption of a three lines of defence risk framework, all areas of the business, including the Executive Committee, are responsible for managing risk through the identification, assessment, and treatment of risks. This includes implementation of risk management initiatives, active management of risks, and compliance with appropriate processes, procedures, checklists and other controls. Teams are also responsible for monitoring these controls to ensure they remain effective, and for reporting on risk management achievements or concerns appropriately. Our Group Risk Officer leads a team of risk management professionals, responsible for working with the organisation to deliver outcomes within our risk management framework. Leaders from across the business convene annually for risk workshops to consolidate their understanding of emerging risks, including climate risks. Business units analyse and evaluate these risks and consolidate findings into a risk profile for each business unit and for the Group. Teams assess asset class portfolios annually for risks and opportunities, including climate- related issues. Climate-related risks and opportunities that may impact assets are prioritised for action based on: • Impact on communities and the environment in which the asset is operating • Overall potential impact on asset performance • Financial impact to the business in managing the risk or opportunity. Across our portfolio, climate-related risks and opportunities are prioritised for action based on: • Geographical areas of highest risk • Design attributes of the asset which affect climate resilience • Climate change scenarios for the medium- and long-term • Overall impact on business-wide emissions reductions • Impact on local communities and environment (relative to where we operate) • Overall risk to portfolio value and revenue. Our approach to risk management is guided by Australia/New Zealand Risk Management Standard (AS/NZS ISO 31000:2009), the Australian Securities Exchange Corporate Governance Principles and Recommendations and other applicable regulatory standards. Our Risk Management Framework includes supporting guidelines, procedures, and tools to help manage risk consistently across the business. These include methods for assessing climate and community resilience across our portfolio. Managing our physical risks and opportunities We include climate and community resilience assessments in the asset-level risk management process. These assessments focus on the capacity of assets and associated communities to withstand severe weather impacts and minimise any disruption, while providing support for the local community. Where we identify a high exposure to extreme weather events, such as cyclones in North Queensland, we supplement our resilience assessments with a detailed assessment of the roof structure and building envelope’s capacity to withstand cyclonic winds. When considering strategies to improve the resilience of an asset, we use an opportunities matrix which looks beyond the traditional risk matrices based on likelihood and consequence ratings. For example, we use the opportunities matrix to identify the value of discretionary climate resilience initiatives such as shade sails in car parks and cool roof covenants in residential communities. In 2019 we updated our climate risk assessment approach into one centralised tool, ensuring a systematic, objective, and standardised process for ongoing climate resilience assessment, management and reporting. It allows users to understand the climate exposure of an individual asset, as well as its adaptive capacity and sensitivities to climate-related risks and opportunities. It covers both the built aspects of an asset, including operation and maintenance of buildings and infrastructure, and considers the community resilience of tenants, residents and / or customers dependant upon the asset. Once assessed, asset adaptation responses will be assigned and tracked through Stockland’s enterprise risk management system. This enables Stockland staff to monitor and evaluate adaptation actions over time, ensuring proactive design is prioritised from the earliest stages of development and ongoing asset management. Collectively, this results in a resource that enhances our ability to consistently create highly liveable and sustainable communities. For assets under development, the management of climate-related risks and opportunities is integrated into our project development lifecycle, known as D-Life. Each stage of the D-Life process requires the delivery of specific sustainability objectives, including climate- related risk assessments at defined approval gates. Stockland Rockhampton, QLD r i s k s C l i m a t e - r e l a t e d CASE STUDY RESILIENCE IN OUR NORTH QUEENSLAND REGION In 2011, Stockland commissioned external research on the key climate risks to which we are exposed, to form our Climate Adaptation Strategy. This research highlighted the exposure of our North Queensland assets to extreme weather events, such as an increase in the frequency and severity of storms and intense tropical cyclone activity. Since then, we’ve actively worked to increase the asset and community resilience in the region, focusing on initiatives such as: • Fastening roofing systems and roof-mounted equipment to improve resilience to cyclonic wind • Replacing corroded box guttering and installing additional downpipes and overflows to avoid stormwater leakage into retail tenancies • Upgrading air conditioning and electrical equipment to provide greater reliability and performance during days of extreme heat • Replacing ageing roofing materials and specifying new roofing systems in developments to utilise ‘cool roof’ technologies to reduce urban heat island effect and heat loads on plant and equipment • Improving the design of stormwater drainage infrastructures to be more resilient to the effects of intense flooding • Implementing new business continuity plans and emergency procedures for assets in regions vulnerable to cyclones. We’ve also worked with the Cyclone Testing Station at James Cook University to complete two cyclonic wind vulnerability and emergency assessments at our Retail Town Centres at Bundaberg and Hervey Bay. These assessments took a detailed look at the roof structure and envelope to identify vulnerability to facility damage from cyclonic wind events. As a result, we haven’t suffered any damage of this type since. The progress that we’ve made in increasing regional resilience is having positive outcomes for both Stockland and the community, including: • Reduced insurance deductibles for our assets following Cyclone Marcia in 2015, due to the completion of cyclone vulnerability and resilience works on our affected assets • No roof structure and building envelope damage suffered by our Retail Town Centres at Bundaberg and Hervey Bay post-cyclonic wind assessments • Reduced exposure of assets to climate-related risks, such as Stockland Rockhampton. Previously exposed to flooding issues due to the creek bed location, Stockland Rockhampton remained resilient during Cyclone Marcia in 2015 with the creek bed not washing away as it had previously during similar events. As of FY19, all Retail Town Centres in Queensland have now undergone a climate resilience assessment. 44 45 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Climate resilience assessment tool STEP 1 Property details STEP 2 Climate hazards STEP 3 Risk assessment STEP 4 Resilience rating STEP 5 Adaptation responses Asset details Current climate hazards Outstanding Outstanding resilience Primary response Property elements Future climate hazards Good Good resilience Secondary response Emergency preparedness Community profile Moderate Normal Moderate resilience Normal resilience E n t e r p r i s e R i s k M a n a g e m e n t S y s t e m Managing our transition risks and opportunities Existing and emerging regulatory requirements related to climate change are incorporated into overall risk management and into our risk register as appropriate. Our Group Risk team is responsible for developing our risk management framework and adapting it to accommodate physical and transitionary changes which may impact our social and environmental performance. Our Government Relations, Risk, Legal and Sustainability teams keep the Executive Committee and Board informed on existing or emerging climate regulation that may impact on the business. In response to regulatory and market risks relating to energy supply and demand, Stockland is committed to promoting efficient operation of our assets and increasing our renewable energy capacity. Following solar installations in FY19, Stockland’s total portfolio solar capacity is 16.4MW, which could generate approximately 21,900,000 kWh in renewable energy annually. This commitment will also help us meet our net zero carbon targets of net zero carbon emissions by 2030 across our logistics centres, retirement living villages and corporate offices, after signing the World Green Building Council’s Net Zero Carbon Buildings Commitment. Managing climate-related transition risks and opportunities also involves participating in industry- wide collaborations such as with the Property Council of Australia and the Green Building Council of Australia, which focus on how the property industry can lead a transition to a low-carbon economy. For example, we have worked with the Green Building Council of Australia as a strategic supporter of their Carbon Positive Roadmap for the built environment. The roadmap establishes the steps required for commercial, institutional and government buildings, and fit-outs to decarbonise and contribute to global climate targets. Total portfolio solar capacity 16.4MW Renewable energy generated (kWh) 12,958,224 2030 carbon emissions target Net zero Across Logistics, Retirement Living and corporate offices Metrics, targets, and results Metrics provided are for the year ending 30 June 2019. In 2006, in recognition of our capacity to contribute to a low-carbon future, we began setting targets to reduce the greenhouse gas (GHG) emissions intensity of our portfolio. Emissions intensity is an established metric for evaluating the energy and emissions efficiency of real estate portfolios, and is calculated by dividing absolute emissions (kilograms of carbon dioxide equivalent) by floor area (square metre). Since 2006, we have achieved a reduction of 57% across our Commercial Property portfolio. As a result of emissions reduction initiatives, we have saved over $106 million in avoided electricity costs over the same timeframe. Our carbon emissions intensity reductions to date contribute to our target reduction of 60 per cent by 2025 (2006 baseline). The bar chart below shows the reduction in carbon emissions intensity across our Commercial Property (Office, Business Parks, and Retail) portfolio since FY06. All figures are in kgCO2-e per square metre (kgCO2-e/sqm). Commercial Property GHG emissions intensity (kgCO2-e/sqm) Renewable energy generated Solar power generated (kWh) Solar PV capacity 175,374 292,124 1,940,689 2,387,168 3,274,463 12,958,224 50 1,360 1,360 2,260 4,360 16,400 17,900 kW FY14 FY15 FY16 FY17 FY18 FY19 Target FY20 The following chart provides absolute Scope 1 and Scope 2 greenhouse gas emissions totals (in kgCO2-e) since FY14. Our Residential business constitutes the majority of our Scope 1 emissions, the levels of which vary each year in accordance with civil contractor construction activity. Commercial Property constitutes the majority of our Scope 2 emissions, which have been decreasing over time because of our energy efficiency and renewable energy initiatives. Total Scope 1 and Scope 2 GHG emissions (kgCO2-e) FY25 TARGET FY19 FY18 FY17 FY16 FY15 FY14 FY06 43.6 46.3 52 54.9 58.6 60.7 61.5 FY19 24,230 FY18 25,101 FY17 26,884 FY16 35,036 FY15 26,368 FY14 22,102 70,545 81,745 87,860 89,881 97,763 99,927 109 Scope 1 Scope 2 In recognition of the potential for renewable energy to both mitigate climate risk and provide financial benefit to our business, we have committed to deliver a total solar generating capacity of 17.9MW by FY20. KEEPING IT SIMPLE Scope 1 emissions are direct emissions from fuels that are combusted on site, such as gas consumption in our buildings or natural gas, diesel and petrol from fleet, as well as refrigerant leakage. Scope 2 emissions result from the consumption of electricity only (indirect emissions from fuels combusted off site). We report our Scope 1 and Scope 2 emissions according to our operational control boundary under the National Greenhouse and Energy Reporting Act 2007. Tenant electricity usage is not included except where we are the tenant. We voluntarily report select Scope 3 emissions in accordance with the GHG Protocol Corporate Standard. Our annual sustainability reporting contains further information on our Scope 1, Scope 2, and Scope 3 emissions. Our targets and metrics are incorporated into annual asset-level business planning and reporting procedures. All staff are required to develop key performance indicators related to sustainability objectives, which include climate-related risks and opportunities where relevant. Performance against these indicators is included in individual staff remuneration evaluations. Our sustainability targets and performance metrics incorporate a broad range of climate-related risks and opportunities, and the entirety of these targets and metrics is provided in our sustainability Deep Dives and Data Packs, available online at www.stockland.com.au/sustainability/downloads. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 46 47 Year ended 30 June 2019Stockland Annual Report 2019 FY19 PRIORITIES STATUS FY19 PROGRESS COMMERCIAL PROPERTY Complete climate resilience assessments in operational assets in priority locations across our portfolio, including our retail town centres at Stockland Cleveland (QLD), Burleigh Heads (QLD), and Caloundra (QLD), and Shellharbour (NSW) and our Logistics assets at Yennora (NSW), Hendra (QLD), and Port Adelaide (SA). Achieved Assessments completed in our Retail Town Centres and Logistics Distribution Centres with a focus on completing assets with exposure in Queensland. Continue to undertake climate resilience assessments in future development projects including Whiteman Edge (WA). Achieved Climate Resilience assessments have been completed on two Retail Town Centre developments – Stockland Baringa and Stockland Birtinya (QLD) as part of the Green Star commitments. The Whiteman Edge project will be assessed when it moves to the next stage of our D-Life process. COMMUNITIES Undertake a formal review of resilience assessment framework approach against industry best practice. RESIDENTIAL Achieved A formal review was undertaken as part of the scope for the development of the Group Climate Resilience Assessment Tool. This ensured that the tool is aligned against industry best practice. Complete climate resilience assessments on new communities in priority locations that commence master-planning during FY19. Achieved We undertook five assessments in the following locations: Hope Island (QLD), Paradise Waters (QLD), Promenade (QLD), Glendalough (WA), and Wellard (WA) using our newly-developed Group Climate Resilience Assessment Tool. RETIREMENT LIVING Complete two assessments in medium priority locations as determined through the national mapping review. Implement the resilience best practice guidelines across five low-medium priority villages that have not had a formal climate and community resilience assessment completed. Achieved In progress We undertook three assessments using our newly-developed Group Climate Resilience Assessment Tool in the following operational villages: Lourdes (NSW), Belcarra (QLD) and Affinity (WA). Two operational villages have been piloted under the new Tool; Hillsview (SA) and Wamberal Gardens (NSW). Further assets will be assessed in FY20 with the newly developed Group Climate Resilience Assessment Tool. r i s k s C l i m a t e - r e l a t e d FUTURE PRIORITIES Commercial Property and Communities • Migrate previous resilience assessments into new Group Assessment Tool for all business units and update results in accordance with new scoring methodology • Undertake new assessments as required including new developments and high priority assets as per national mapping exercise • Communicating and building capacity internally on the use of the new Group Climate Resilience Assessment Tool including Risk and National Operations Team • Review our Climate Target approach and establish targets for 2021 and beyond. 48 Hendra Industrial Estate, QLD 49 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary A better way to deliver shared value s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y 51 Aura, QLD 50 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Our approach to sustainability As a real estate owner, manager and developer we believe we have both the opportunity and responsibility to create the right balance of social, environmental and commercial conditions for our community, customers and investors now and in the future. Our sustainability strategy focuses on this opportunity to deliver shared value across a range of stakeholders with a view towards achieving our vision: To be a great Australian property company that makes a valuable contribution to our communities and country. We are committed leaders in sustainability and believe this approach is fundamental to the way we do business. Our three sustainability pillars are integrated with our business strategy to ensure we maintain our competitive advantage and deliver shared value to all our stakeholders. We measure and report on our performance against a range of global sustainability assessments and standards to ensure we’re continuously setting the benchmark in terms of leading sustainability disclosure. FY19 SUSTAINABILITY LEADERSHIP S e c t o r L e a d e r 2 0 1 8 GRESB Global Real Estate Sustainability Benchmark – Global Sector Leader for Listed, Diversified – Office/ Retail company, and 25th out of 874 companies globally. FRAMEWORKS DJSI Ranked most sustainable real estate company for the 5th time, and listed on the World Dow Jones Sustainability Index for 12 consecutive years. CDP Only Australian property company on the Climate A List for carbon disclosure and performance. Shape thriving communities Our focus is on creating robust communities with strong connections and opportunities. This supports our growth as a business, delivering better social, environmental and economic outcomes for all our stakeholders. Optimise & innovate Innovation is at the core of everything we do, as we continue to find more efficient ways to do business, investing in technologies that support our priorities, while minimising the impact we have on the environment. Enrich our value chain By creating stable and deep-rooted relationships, we can protect our supply chain, manage risk and ensure sustainable and transparent practices. Community connection Health & wellbeing Education S H A PE THRIVING C O MMUNITIES STRENGT H CAPITAL Maximise returns through community creation Stakeholder engagement Governance & risk E V A N R L I U C E H C O H U A R I N Supply chain Employees E AT E OPTIMIS & INNOV OPERATIO N A L EXCELLENC E DELIVERING SHARE D V A L U E Waste & materials G R R E O T W U R A N S S S E T GRI We report our sustainability progress in accordance with the Global Reporting Initiative (GRI) Comprehensive Sustainability Reporting Standards, independently assured Ernst and Young (EY). Sustainable Development Goals We contribute to a number of the 17 United Nations Sustainable Development Goals. Refer to our Reporting Approach for details on how we contribute, available online at www.stockland.com.au/ sustainability/downloads. UN Global Compact We are a signatory to the United Nations Global Compact (UNGC) and support the 10 principles of the Global Compact on human rights, labour, environment and anti-corruption. Biodiversity Water management & quality Carbon LBG We report and verify our community investment data inline with London Benchmarking Group (LBG), as managed by Corporate Citizenship. TCFD Climate-related disclosures reported inline with The Task Force on Climate- related Financial Disclosures (TCFD) recommendations. ASSURANCE The sustainability reporting content within the Annual Report has been externally assured in accordance with the Australian Standard for Assurance Engagements (ASAE3000): Assurance Engagements other than Audits and Reviews of Historical Financial Information and (ASAE 3410): Assurance Engagement on Greenhouse Gas Statements by Ernst & Young (EY). A copy of EY’s assurance statement is available on our website at www.stockland.com.au/about-stockland/sustainability. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 52 53 Year ended 30 June 2019Stockland Annual Report 2019 Shape thriving communities Our ability to shape thriving communities is fundamental to our success. Our research clearly shows that in order for a community to prosper, it needs a focus on health and wellbeing, strong community connection, and education. At Stockland we have made these elements a key focus of our strategy. STRATEGIC PRIORITIES FY19 PROGRESS HEALTH AND WELLBEING Community activities and spaces that encourage positive physical and mental health and wellbeing. Smart design that optimises accessibility, safety and mobility. COMMUNITY CONNECTION 76.3% score for Residential community resident Personal Wellbeing Index (national average is 74.2-76.7%).1 82.5% retirement living resident Personal Wellbeing score (above the national average of 73-77%).1 7,179kg lost by our Live Life Get Active participants at our Residential communities. Activities that foster engagement, pride and a sense of belonging. Design that encourages sense of place and supports recreation and participation. $8.3 million invested in community initiatives across Australia in FY19. $286,000 in grants to 286 local organisations in our communities in FY19. Community Partnership Impact Tool developed to assess the social and business value generated by our community partnerships and programs. EDUCATION Programs that support economic employment within our communities. Design that facilitates learning and education opportunities for all ages. e-learning module developed on “Welcoming customers with disability” in partnership with the Australian Network on Disability and other industries. ‘Retail Ready’ program developed for Stockland Retail Town Centres to support local indigenous employment. Our goal is to create and shape communities that thrive now and into the future OUR COMMUNITY EFFORTS To achieve our priorities in shaping thriving communities, our efforts are focused on: Customer engagement Maintaining high levels of communication with our local community so we can be responsive to their needs. See page 30 (Operational Excellence) for more information. Community development Local community programs, initiatives and infrastructure that enhance the communities in and around Stockland assets. This includes Stockland CARE Foundation Grants. Community investment Employee volunteering and giving program and Stockland CARE Foundation – our charitable trust, which delivers infrastructure, programs and initiatives to Australian communities. 1 As measured using Deakin University’s methodology. Altrove Park, NSW OUR TARGETS To help shape thriving communities we have set meaningful targets for the future. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y All Stockland Communities (residential and retirement living) score above the Australian average National Wellbeing Index to FY20. Achieve consistent Stockland National Liveability Index scores of 75% across residential communities. Make a meaningful contribution to community health and wellbeing, community connection and education in partnership with community groups supported directly by the Stockland CARE Foundation. 54 55 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary The value of our community contribution In FY19, we invested over $7.4 million through our community development and community investment programs, as verified by Corporate Citizenship. The table below provides an overview of our community contributions. A further breakdown of these contributions by category is provided in our Community Data Pack. Community contribution category Community Development (includes national partnerships, Stockland CARE Grants, asset-based contributions, community infrastructure) Community Investment (includes workplace giving, in-kind donations, corporate donations, partnerships, volunteering and Stockland CARE Foundation) FY19 $4,840,339 $1,177,423 Management costs1 $1,393,159 Total community contribution $7,410,921 1 Includes average salaries, costs associated with the development, design and delivery of Stockland’s sustainability report, costs of running strategic community programs and training for community employees. Stockland CARE Foundation The Stockland CARE Foundation is a charitable trust set up for the purpose of delivering infrastructure, programs and initiatives that improve the health, wellbeing and education of communities in and around our assets. Established in 2015, the Foundation supports charitable partners that align with our organisational purpose, strategy and values. In FY19 our charitable partners, Redkite and the Touched By Olivia Foundation received financial and in kind support from the Stockland CARE Foundation. Over $416,000 was raised for our partners, helping to deliver four inclusive playspaces (taking our total to 13) and support 93 Redkite families. Investing in our communities In conjunction with our partners, we develop and deliver social infrastructure and programs to ensure we enhance the communities in and around our assets. In FY19, we implemented a total of 1,236 community development initiatives, ranging from weekly walking groups with the Heart Foundation, healthy eating and nutrition programs with Jamie’s Ministry of Food, and delivering STEAM education programs to primary school students with the National Theatre for Children. We expanded our Heart Foundation Walking Groups across our portfolio and now have 35 active weekly walking groups. In FY19 1,237 people participated in walking groups in shopping centres and 244 in retirement villages. Together, these walkers completed a total of 55,184 walks in FY19. We also provide infrastructure to support community connection, such as community centres, hubs and multi-use and informal spaces. We seek to engage with residents, community groups and partners on all projects, so we can have the greatest positive impact on communities where people live. Baringa Primary School, Aura QLD Stockland CARE Grants More detail can be found in our Community Deep Dive, available online at www.stockland.com.au/sustainability/downloads. CASE STUDY VALUING OUR COMMUNITY PARTNERSHIPS Metrics are essential to improving our operational performance, but how do you measure the social value of the initiatives? This year, Stockland engaged KPMG to develop a Community Partnership Impact Tool to assess the social and business value generated by our community partnerships and programs. This builds on the Social Return on Investment work we undertook in 2017 on our Retirement Living communities. Using this tool, we were able to measure the social and business impact of our current national community programs, including Live Life Get Active, The Heart Foundation Walking Groups, Jamie Oliver’s Ministry of Food, Bowls Australia and ABCN. With the Community Partnership Impact Tool we can now identify the financial value these programs deliver to the community and Stockland, by assigning an indicative dollar value on their impact. For example, Stockland’s partnership with Live Life Get Active, now in its fourth year, creates significant social value by promoting health and wellbeing and strengthening community connection, with over 7,000 participants in FY18. Using our social impact tool, we estimate that this has helped generate $2.4 million dollars in health and wellbeing benefits, and provided $2.7 million in social value to the participants. Quantifying our social impact helps paint the picture of our social commitment to our customers in a tangible way. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y Jamie’s Ministry of Food, Stockland Burleigh Heads, QLD 56 57 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Optimise and innovate As one of Australia’s largest real estate developers, we’re committed to reducing our impact on the environment whilst creating resilient assets and communities that cater to our customers’ needs, now and in the future. We respond to resource constraints and the need to mitigate climate impacts through smart design, investment in technology and operational efficiencies in our assets and communities, delivering savings for our business and customers, whilst future-proofing our portfolio. STRATEGIC PRIORITIES FY19 PROGRESS CLIMATE RESILIENCE, ZERO CARBON & ENERGY EFFICIENCY Reduce emissions. Invest in renewable energy. Improve portfolio climate resilience. 14.7% reduction in carbon intensity of Retail Town Centres from FY18. 1%1 increase in carbon intensity of Workplace and Business Parks from FY18. 12.1MW of solar capacity installed in FY19, bringing our total portfolio solar capacity to 16.4 MW. We’ve committed to additional solar roll-outs in FY20, to bring our total solar investment to over $33 million. BIODIVERSITY Minimise impact on ecological communities and protected or significant species. Design communities to promote nature reserves and parklands. 152 hectares of land rehabilitated through rehabilitation activities at our project sites. 100,000 trees planted at Newport to restore an environmental corridor and protect the adjacent Ramsar wetlands. WATER MANAGEMENT & QUALITY Improve water efficiency and sustainable sourcing. Deliver projects that minimise water use and positively contribute to local water catchments. 1%1 increase in water intensity of Retail Town Centres from FY18. 7% reduction in water intensity of Workplace and Business Parks from FY18. 8% improvement on water consumption compliance for our Residential portfolio, exceeding our target of exceeding minimum water compliance standards by five per cent by FY20. WASTE & MATERIALS MANAGEMENT Reduce, reuse and recycle waste to minimise our contribution to landfill. 94% waste diverted for Commercial Property developments seeking Green Star Design & As Built certifications. Specify the use of ecologically- preferable materials. 98% waste diverted from landfill across our Residential developments. 1 The increase in intensity can be attributed to a number of factors including portfolio changes such as divestments, vacancy, billing and metering issues. See our Sustainability Deep Dive Series for more information, available online at www.stockland.com.au/sustainability/downloads. We provide business solutions that better service our customers while reducing our impact on the environment. Focus on renewable energy We continued our focus on renewable energy in response to transition risk, installing the largest solar photovoltaic (PV) system installed on a single rooftop in Australia, at Green Hills Retail Town Centre. This reduced our reliance on grid power by over 45 per cent, and reduced grid demand by 30 per cent. Our investment in PV infrastructure reduces our carbon emissions and will deliver returns of over 10 per cent through reduced power costs in the next 10 years. Stockland Green Hills solar, NSW More detail can be found in our Sustainability Deep Dive series, available online at www.stockland.com.au/sustainability/downloads. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y OUR TARGETS We intend to continue to optimise and innovate by challenging ourselves to do better each year. To that end we have set some ambitious new targets for the future. Climate and energy 60% reduction in carbon emissions by FY25 in Commercial Property. All new residential and retirement living communities to be designed as 10% more energy efficient than regulatory standards. Biodiversity New masterplanned community developments to have an aggregated net positive contribution to biodiversity value by FY20. Water management and quality Retail town centres and retirement living villages to reduce water intensity by 5%, and all new residential communities designed to exceed minimum water efficiency standards by 5%. Waste and materials Divert at least: • 85% of Retail Town Centre development waste from landfill. • 60% of Residential development waste from landfill. • 45% of Commercial Property operational waste from landfill. 58 59 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Resilient communities and assets For over a decade, Stockland has been committed to assessing and managing the physical and transition risks related to climate change for our assets, communities, and customers. OUR COMPREHENSIVE APPROACH INVOLVES 1 2 3 Mapping our portfolio Identifying assets where climate and community resilience is a priority Conducting resilience assessments with action plans to improve resilience where necessary Following a comprehensive review, in FY19 we updated our climate risk assessment approach to streamline our climate and community resilience work into one centralised tool. This strengthens our approach to resilience across the Group by embedding resilience within our enterprise risk management system, and bolsters our reporting requirements to be consistent with Task Force on Climate-related Financial Disclosures (TCFD). During 2019, climate resilience assessments were conducted at our Retail Town Centres at Cleveland, Caloundra, Burleigh Heads and Shellharbour and Logistics assets at Hendra, Yennora, and Port Adelaide. The role of ratings and certifications We are committed to the continuous optimisation of our assets and innovation across our portfolio. In doing so, we obtain ratings and certifications that independently confirm our sustainability credentials and verify the sustainability performance of our projects and assets. Assets that are highly rated are more resource-efficient, delivering long-term cost savings and a higher return on investment. They also promote features that enhance health, wellbeing and positive social impact on an individual and community level. More detail can be found in our Climate Resilience Deep Dive, available online at www.stockland.com.au/sustainability/downloads NABERS & GREEN STAR CERTIFICATIONS ACROSS OUR PORTFOLIO Rating 4.3 stars 3.4 stars 4.5 stars 3.6 stars Certification NABERS Energy Retail Town Centre portfolio average NABERS Water Retail Town Centre portfolio average NABERS Energy Workplace and Business Parks portfolio average NABERS Water Workplace and Business Parks portfolio average 45 centres Green Star Performance rated Retail Town Centres, Workplaces and Business Parks 27 assets Green Star Design & As Built, Communities and Retirement Living rated assets 60 CASE STUDY LEADING THE WAY IN CARBON AND ENERGY USAGE AND REDUCTION At Stockland, we are recognised as a global leader in managing climate change risk and reducing our carbon emissions. We are committed to both transparency and action, and execute on both to deliver value to our business, customers, and shareholders. • Since 2006, we have reduced our emissions intensity by over 57 per cent, and saved over $106 million through energy efficiency initiatives • We were the first Australian listed property group, and one of the first 15 organisations globally, to sign the World Green Building Council’s (WorldGBC) Net Zero Carbon Buildings Commitment and commit to the target of zero net carbon emissions across our logistics centres, retirement living villages and corporate offices by 2030 • We were an early adopter of the TCFD recommendations, demonstrating active management of climate risks and our ability to capitalise on climate opportunities • In FY19 we installed a further 12.1MW of solar capacity, bringing our total portfolio solar capacity to 16.4 MW. We’ve committed to additional solar roll-outs in FY20, to bring our total solar investment to over $33 million • We are partnering with the Victorian Government (Sustainability Victoria) on a two-year program to design, build and market the first zero net carbon homes in Australia • 82 electric vehicle charging stations have been installed in 24 Retail Town Centres across the country. More detail can be found in our Sustainability Deep Dive series, available online at www.stockland.com.au/sustainability/downloads. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y Stockland Green Hills, NSW 61 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Enrich our value chain Enriching our value chain is about how we manage risks and opportunities in collaboration with our employees, supply chain, and other key stakeholders. This extends from our governance and risk management at a corporate level, to every interaction we have with both internal and external stakeholder groups. We aim to enhance the value we create by forming positive relationships that extend our capacity to deliver leading sustainability outcomes. STRATEGIC PRIORITIES FY19 PROGRESS SUPPLY CHAIN MANAGEMENT Identify and address key environmental, social and governance risks in our supply chain. Collaborate with our partners to raise awareness of sustainability issues and encourage sustainable procurement. HUMAN RIGHTS Sustainability Schedule included in our construction contracts, targeting environmental impact, material use, community and health and wellbeing. $3.6 million procured from Indigenous suppliers since 2014. Supply Chain Sustainability School contractor learning modules launched, focusing on Modern Slavery, Human Rights and Sustainable Procurement. Identify, assess and implement responses to human rights related issues across our business. Industry supply chain tool developed in partnership with PCA and members to strengthen property industry approach to human rights within the supply chain. Train employees on human rights considerations and obligations. 194% increase in Australian Workplace Equality Index Score due to focus on LGBTQI+ diversity practices. Progress human rights initiatives across our entire value chain. Four new inclusive playspaces built in collaboration with Touched by Olivia. EMPLOYEE ENGAGEMENT, DEVELOPMENT, DIVERSITY & INCLUSION Attract and retain high-performing employees. Develop authentic, accessible and performance-focused leaders. Maintain a diverse and inclusive workforce. 81% employee engagement score, four points above the Australian National Norm.1 500 employees took part in our ‘Ways to Wellbeing’ stress and resilience course to strengthen wellbeing. 83.2% of employees work flexibly. 45.8% of management roles filled by women. STAKEHOLDER ENGAGEMENT Develop and maintain strong relationships through regular and genuine engagement with stakeholders. Stakeholder engagement plans in place or in development for all active projects. Engagement framework reviewed to incorporate greater focus on engagement with Aboriginal and Torres Strait Islander communities. 1 Survey undertaken by Willis Towers Watson. 62 Stakeholder engagement Consultation and engagement with stakeholders is a core part of our business and plays a key role in shaping and influencing the design, planning and operation of our projects. It is vital in terms of maintaining our social licence in the communities we operate in – something in which we take a lot of pride. When developing a masterplan community, engaging with government and community stakeholders is an important and often essential requirement of achieving the planning approval that permits us to develop the land. More importantly, the feedback we get from this engagement ensures that the places we create are designed by the people who will use them. For example, engaging with local government and our residents at Elara, in Western Sydney in FY19 has been vital in finalising the design of the communities riparian corridor – which when complete will provide a 24 hectare parkland and become Elara’s central public open space. OUR TARGETS Our value chain is important to the integrity of our business. As such we are committed to continuous improvement initiatives to achieve even better practices and have set ambitious future targets. Women in management Increase women in management to 50% by 2020. Employee engagement Maintain employee engagement score above 80%. Stakeholder engagement Maintain stakeholder engagement plans for all active development projects, and deliver stakeholder engagement workshops to our employees. The Pavillion Aspire Elara, NSW Supply chain Launch our Sustainability in our Development Supply Chain guideline. More detail can be found in our Stakeholder Engagement Deep Dive, available online at www.stockland.com.au/sustainability/downloads. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y 63 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Supply chain and human rights management Enriching our value chain requires a focus on effective management of our supply chain. Doing so enhances our long-term business performance, enabling us to identify and address key environmental, social and governance risks and opportunities. Every year, we partner with hundreds of suppliers including construction contractors, professional consultants, and service providers. We believe that by building strong, transparent relationships with our suppliers, we can encourage them to undertake sustainable procurement practices and promote effective human rights management across our entire supply chain. We focus on industry collaboration and supplier education. Key focus areas in FY19 included: • Working with the Property Council of Australia’s Sustainability Roundtable, helping procure a Modern Slavery Supplier Engagement Tool to increase supply chain transparency. The tool delivers a human rights assurance process to assess suppliers consistently across 15 member property groups • Completing our first Innovate Reconciliation Action Plan (RAP), which includes 58 actions across 16 focus areas that value and celebrate Australia’s First Peoples. This includes partnering with WorkStars, an indigenous recruitment company in South East to Central Queensland, targeting career opportunities at our assets • Working with Supply Chain Sustainability School to develop education modules for construction contractors, delivering easily-accessible training on Stockland’s sustainability principles and requirements, human rights and modern slavery, and sustainable procurement. More detail can be found in our Supply Chain Deep Dive and Human Rights Deep Dive, available online at www.stockland.com.au/sustainability/downloads. 64 CASE STUDY RECONCILIATION IN ACTION In FY19, Stockland took the initiative to develop a ‘Project RAP’ for two Retail Town Centre developments on the Sunshine Coast, Baringa and Birtinya, working with the local Aboriginal community (Kabi Kabi peoples) to develop initiatives that would benefit their community at both a project and community level. Utilising existing relationships established with local Kabi Kabi stakeholders and Native Title applicants, we engaged an Aboriginal owned consultancy, Balarinji to help facilitate authentic engagement around culture, art, employment, skills, storytelling and identity. We conducted workshops and meetings to consult and develop a range of initiatives that aligned to Kabi Kabi interests and needs. Key initiatives undertaken as part of the Project RAP included: • Engagement and ideas generation workshops • Retail Ready – a five-week Retail Skills Program for indigenous participants • Retailer Welcome Pack Gift including design by local Kabi Kabi artist • Cultural Awareness Training held with Stockland project team • Kabi Kabi Acknowledgement/Welcome Ceremony held at centre opening event • RAP Plaque installed in centre public mall space. With the development of our next Innovate RAP for FY20-22 underway, we look to continue our reconciliation focus on initiatives regarding health and wellbeing, education, and community connection to help shape thriving communities that respect, value and celebrate Australia’s First Peoples. s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y Opening of Stockland Birtinya, QLD 7 December 2018 65 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Governance and remuneration r e m u n e r a t i o n G o v e r n a n c e a n d 67 Warwick Farm, NSW 66 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Our Board and governance The Board is accountable to securityholders and responsible for demonstrating leadership and oversight so that the operations of Stockland are effectively managed in a manner that is properly focused on its economic, social and community objectives. The Board has overall responsibility for the good governance of Stockland. Our Directors TOM POCKETT Chairman Tom Pockett was appointed to the Board on 1 September 2014 and became Non-Executive Chairman on 26 October 2016. Mr Pockett has extensive experience in both the property and financial sectors having held a number of senior executive positions including Chief Financial Officer and Executive Director of Woolworths Limited, Deputy Chief Financial Officer at the Commonwealth Bank of Australia and several senior finance roles at Lend Lease. He is the Chairman of Autosports Group Limited and a Director of Insurance Australia Group Limited. In addition to his role as the Chair of the Stockland Board, Mr Pockett is Chair of the Sustainability Committee and a member of the Human Resources Committee. Mr Pockett is also Chairman of the Stockland CARE Foundation Board. Qualifications BComm, FCA Directorships of other listed entities in last three years Autosports Group Limited (29 August 2016 to present), Insurance Australia Group Limited (1 January 2015 to present) I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y MARK STEINERT Managing Director and Chief Executive Officer Mark Steinert was appointed Managing Director and Chief Executive Officer of Stockland on 29 January 2013. Mr Steinert was also appointed to the Board on 29 January 2013. Mr Steinert has over 27 years’ experience in property and financial services including eight years in direct property primarily with Jones Lang LaSalle and 10 years in listed real estate with UBS where he held numerous senior roles including Head of Australasian Equities, Global Head of Research (Equities and Fixed Income) and Global Head of Product Development and Management for Global Asset Management. Mr Steinert is a past President and current Director of the Property Council of Australia and a member of the Property Male Champions of Change. Mr Steinert is a member of the Sustainability Committee and a Director of Stockland Capital Partners Limited, the Responsible Entity for Stockland’s unlisted property funds. Mr Steinert is also a Director of the Stockland CARE Foundation Board. Qualifications BAppSc, G Dip App Fin & Inv (Sec Inst), F Fin, AAPI Directorships of other listed entities in last three years None MELINDA CONRAD Non-Executive Director Melinda Conrad was appointed to the Board on 18 May 2018. Ms Conrad has more than 25 years of expertise in consumer-related industries, including as a retail entrepreneur and CEO, and roles at Colgate-Palmolive and Harvard Business School. Ms Conrad is currently a Director of ASX Limited and Caltex Australia Limited. She is also a Non-Executive Director of The George Institute for Global Health, The Centre for Independent Studies, and is a member of the ASIC Director Advisory Panel and the AICD Corporate Governance Committee. Ms Conrad is Chair of the Human Resources Committee and a member of the Sustainability Committee. Qualifications BA, MBA, FAICD Directorships of other listed entities in last three years The Reject Shop Limited (19 August 2011 to 30 June 2017), OFX Group Limited (19 September 2013 to 28 September 2018), ASX Limited (1 March 2017 to present), Caltex Australia Limited (1 March 2017 to present) BARRY NEIL Non-Executive Director Barry Neil was appointed to the Board on 23 October 2007. Mr Neil has over 40 years’ experience in all aspects of property development, both in Australia and overseas. Mr Neil’s executive career included senior property and investment roles at both Mirvac and Woolworths Limited and has included the acquisition, development and operation of landmark developments in multiple asset classes. Mr Neil is Chairman of Keneco Pty Limited and Bitumen Importers Australia Pty Limited and a Director of Terrace Tower Group Pty Ltd. Mr Neil is Chair of Stockland Capital Partners Limited Board, the Responsible Entity for Stockland’s unlisted funds and a member of the Audit Committee and Sustainability Committee. Qualifications BE (Civil) Directorships of other listed entities in last three years None 68 69 Year ended 30 June 2019Stockland Annual Report 2019 STEPHEN NEWTON Non-Executive Director Stephen Newton was appointed to the Board on 20 June 2016. Mr Newton has extensive experience across real estate investment, development and management and infrastructure investment and management. Mr Newton is a Principal of Arcadia Funds Management Limited, a real estate investment management and capital advisory business and prior to this, he was the Chief Executive Officer – Asia/Pacific for the real estate investment management arm of Lend Lease. Mr Newton is currently a Director of BAI Communications Group, Viva Energy REIT Group and Sydney Catholic Schools Limited, and Chairman of the Finance Council for the Catholic Archdiocese of Sydney. Mr Newton is Chair of the Audit Committee and a member of the Risk Committee and Sustainability Committee. He is a Director of Stockland Capital Partners Limited, the Responsible Entity for Stockland’s unlisted funds and Chair of the Stockland Capital Partners Limited Audit and Risk Committee. Qualifications BA (Ec and Acc), M.Com, MICAA, MAICD Directorships of other listed entities in last three years Gateway Lifestyle Group (28 April 2015 to 10 October 2018), Viva Energy REIT Group (10 July 2016 to present) CHRISTINE O’REILLY Non-Executive Director Christine O’Reilly was appointed to the Board on 23 August 2018. Ms O’Reilly’s executive career included 30 years’ experience in both financial and operational entities both domestically and offshore. Following an early career in chartered accounting and investment banking, she has held a number of senior executive roles in diverse industries including CEO and Director of the GasNet Australia Group and Co-Head of Unlisted Infrastructure Investments at Colonial First State Global Asset Management. Ms O’Reilly is currently a Director of CSL Limited, Transurban Limited, Medibank Private Limited and Baker Heart and Diabetes Institute. Ms O’Reilly is the Chair of the Risk Committee and a member of the Audit Committee and Sustainability Committee. Qualifications Bbus Directorships of other listed entities in last three years CSL Limited (16 February 2011 to present), Transurban Limited (12 April 2012 to present), Medibank Private Limited (31 March 2014 to present) CAROL SCHWARTZ AO Non-Executive Director Carol Schwartz was appointed to the Board on 1 July 2010. Ms Schwartz is a dynamic business leader with a career spanning property, the arts, finance, government and health sectors. A prominent spokesperson on the issues of governance, social enterprise and women’s leadership, Ms Schwartz is a Director of the Reserve Bank of Australia and is on the Board of a number of organisations including Qualitas Property Partners. Ms Schwartz is Chair of Women’s Leadership Institute Australia and in 2016 was inducted into the Australian Property Hall of Fame. Ms Schwartz is a member of the Risk Committee, Human Resources Committee and Sustainability Committee. Qualifications BA, LLB, MBA, FAICD Directorships of other listed entities in last three years Temple and Webster Group (31 July 2015 to 25 October 2016) ANDREW STEVENS Non-Executive Director Andrew Stevens was appointed to the Board on 1 July 2017. Mr Stevens’ executive career at Price Waterhouse, PricewaterhouseCoopers and IBM, has provided him with experience in change management and in business and ICT programme design and risk evaluation, governance and delivery, and in business transformation and regional/ global expansion. Mr Stevens is Chairman of the Board of Innovation and Science Australia and the Chairman of the Data Standards Body for the Consumer Data Right implementation in Australia. Mr Stevens also serves as a Director of Thorn Group Limited, Western Sydney Football Club, and the Committee for Economic Development of Australia. Mr Stevens is a member of the Advisory Executive of the University of NSW School of Business and the Male Champions of Change. Mr Stevens is a member of the Audit Committee and the Sustainability Committee. Qualifications BComm, MComm, FCA Directorships of other listed entities in last three years Thorn Group Limited (1 June 2015 to present), MYOB Group Limited (30 March 2015 to 8 May 2019) CAROLYN HEWSON AO Non-Executive Director (Former Director) Carolyn Hewson was appointed to the Board on 1 March 2009 and retired from the Board on 24 October 2018. Ms Hewson has over 30 years’ experience in the financial sector, with extensive financial markets, risk management and investment management expertise. Ms Hewson is a Director of BHP Group Limited and Infrastructure SA. She is also an ambassador of Impact 100 South Australia. During her time with Stockland, Ms Hewson was Chair of the Human Resources Committee, Chair of the Risk Committee and member of the Sustainability Committee. Qualifications BEc (Hons), MA (Ec), FAICD Directorships of other listed entities in last three years BHP Group Limited (31 March 2010 to present) I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 70 71 Year ended 30 June 2019Stockland Annual Report 2019 Our Executive Committee Key management personnel for the purposes of the Remuneration Report MARK STEINERT Managing Director and Chief Executive Officer Refer to biography on page 69. KATHERINE GRACE General Counsel and Company Secretary Katherine Grace was appointed General Counsel and Company Secretary on 21 August 2014 and has responsibility for Stockland’s legal and risk functions. As the Company Secretary Ms Grace is directly accountable to the Board, through the Chairman for all matters relating to governance and the proper functioning of the Board. Ms Grace has practised as a solicitor for over 15 years with extensive experience in corporate, property, debt and capital markets transactions working with a wide range of stakeholders including listed board directors, equity investors, regulators, media and financiers. Prior to joining Stockland, Ms Grace held roles as General Counsel and Company Secretary for Westfield Retail Trust and Valad Property Group. Qualifications BA (Hons), LLB (Hons), MPP, MAICD LOUISE MASON Group Executive & CEO Commercial Property Louise Mason was appointed Group Executive & CEO Commercial Property on 18 May 2018. Ms Mason has 28 years’ experience in real estate and is responsible for all aspects of Stockland’s extensive Commercial Property portfolio of retail town centres, workplace and logistics assets with a combined value of $10.188 billion as at 30 June 2019. Prior to joining Stockland, Ms Mason was Chief Operating Officer of AMP Capital Real Estate. She has also held several senior executive operational and development roles at AMP in retail, office, and industrial, as well as retail management positions at Lendlease. Ms Mason is the immediate past President of the NSW Division of the Property Council of Australia. Qualifications BA, LLB (Hons), GAICD TIERNAN O’ROURKE Chief Financial Officer Tiernan O’Rourke was appointed Chief Financial Officer on 8 October 2013. Mr O’Rourke has more than 25 years’ experience in senior financial, commercial and planning roles across a range of industry sectors and throughout the Asia Pacific Region, predominantly focused on Australia and New Zealand. He was previously Chief Executive of Transfield Services Middle East and Asia Region. Before that he was the Chief Financial Officer at Transfield Services Limited, with responsibility for financial strategy and policy, financial and management reporting, treasury and taxation. Prior to his role at Transfield, Mr O’Rourke was Chief Financial Officer of Australand Holdings Limited where he played a key role partnering with the business to transform the strategy and structure of the group. He has also held senior finance positions at AGL, Westfield, CSR and Brambles. At Westfield Holdings Limited he held the position of Group Controller – Trusts, responsible for public reporting of Westfield’s trust vehicles including Westfield Americas Trust and Westfield Trust. Qualifications BComm (Hons), MBA, FCA, GAICD ANDREW WHITSON Group Executive & CEO Communities Andrew Whitson was appointed Group Executive & CEO Communities on 1 July 2013. Mr Whitson oversees Stockland’s 56 Residential Communities with a portfolio of 76,000 lots and an approximate end value of $21.4 billion, and our 62 Retirement Living villages with a development pipeline of over 3,500 units as at 30 June 2019. Mr Whitson joined Stockland in early 2008 as Regional Manager for Greater Brisbane and Far North Queensland. He was appointed General Manager Residential, Victoria in July 2009 and in November 2012, his role expanded to include New South Wales. He was Group Executive and CEO of the Residential business in 2013 before his role was expanded to lead both our Residential and Retirement Living businesses as the combined Communities function in August 2018. Andrew is the Chair of the Residential Development Council of Australia and a Director of the Property Council of Australia and the Green Building Council of Australia. Qualifications BE (Civil) Senior Executives ROBYN ELLIOTT Chief Innovation, Marketing and Technology Officer Robyn Elliott was appointed Chief Innovation, Marketing and Technology Officer on 26 March 2018. Ms Elliott is responsible for innovation, marketing and technology across the organisation. She has extensive experience managing IT and innovation at large corporates in Australia, most recently in the role of Chief Information Officer at Fairfax where she led the customer-centred design and agile development of digital products. Prior to that, she spent 12 years as Chief Information Officer at Foxtel. Ms Elliott has completed the Strategy and Innovation Executive Program at MIT and has an MBA in Technology Management. She has been involved in a number of innovation initiatives including the Australian Financial Review mobile app, Domain, goodfood, Traveller and Fairfax Events. Qualifications BComm, MBA, Exec. Ed, GAICD I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 72 73 Year ended 30 June 2019Stockland Annual Report 2019 KAREN LONERGAN Group Executive, People and Culture Karen Lonergan joined Stockland as Group Executive, People and Culture on 11 March 2019. Ms Lonergan has over 25 years’ experience working in senior roles in HR strategy development, organisational development and transformation and change leadership in the Transportation, FMCG, and Retail sectors across Australia, Asia, the USA and Europe. She was previously the Chief People Officer at David Jones and Country Road Group, after being a People Director at Woolworths Group Limited. Prior to her role at Woolworths, Ms Lonergan was the Executive Manager, Human Resources for Qantas International, responsible for the organisation’s global Human Resources function. Qualifications Bbus, MM, MAICD, FAHRI DARREN REHN Group Executive & Chief Investment Officer Darren Rehn was appointed Group Executive & Chief Investment Officer on 18 March 2013. Mr Rehn has over 30 years’ experience in the property sector. He commenced at JLL undertaking real estate research and valuations, before moving to SGIC working in property funds management and equity investments. Prior to Stockland, Mr Rehn spent 16 years in investment banking, leading the premier Australasian Real Estate teams at UBS and Merrill Lynch where he was involved in many of the larger Australian real estate initial public offerings, mergers, acquisitions and capital raisings. He has extensive experience advising boards and senior management on business development, acquisitions and divestments, and major transactions. Qualifications B.App.Sc. (Val) Former Executives STEPHEN BULL Group Executive & CEO Retirement Living Stephen Bull was Stockland’s Group Executive & CEO Retirement Living from 15 July 2013 to 7 September 2018. Mr Bull departed Stockland in September 2018. MICHAEL ROSMARIN Chief Operating Officer Michael Rosmarin was Stockland’s Chief Operating Officer from 1 July 2013 to 7 September 2018. Mr Rosmarin departed Stockland in September 2018. SIMON SHAKESHEFF Group Executive, Strategy, Research and Stakeholder Relations Simon Shakesheff was Stockland’s Group Executive, Strategy, Research and Stakeholder Relations from 22 July 2013 to 16 November 2018. Mr Shakesheff departed Stockland in November 2018. The following executives departed Stockland during the period: 74 BOARD FOCUS AREAS IN FY19 Stockland’s Board has been actively engaged in FY19, with Directors reviewing and approving several significant transactions to further the Group’s strategic priorities across each asset class. The Board has actively responded to the evolving governance regime including through the assessment of findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industries, the Fourth Edition of the ASX Corporate Governance Principles and Recommendations, and the recent APRA recommendations on remuneration. During FY19 the Board Charter was reviewed and updated together with key policies relating to privacy and whistleblowing. Committee memberships were also reviewed following Board renewal, with new Chairs appointed to both the Risk Committee and Human Resources Committee. The Human Resources Committee and the Board also actively participated in the evaluation of senior executive performance in FY19. As part of the Board’s ongoing commitment to engage with stakeholders including employees, the Board attended meetings, and toured a range of assets, in New South Wales and Victoria, met with securityholders at the October 2018 AGM and held a stakeholder event in Victoria for Stockland partners and suppliers. The Chairman also attended a series of governance meetings with major investors. Interstate meetings in Perth and Queensland are scheduled for the Board and its Committees in FY20. r e m u n e r a t i o n G o v e r n a n c e a n d Highlands, VIC 75 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Our approach to corporate governance and risk management The Board places a high importance on its corporate governance responsibilities and in FY19 was in compliance with all of the recommendations in the ASX Corporate Governance Principles and Recommendations. The Board also recognises the importance of building and fostering a risk aware culture, so that every individual takes responsibility for risks and controls in their area of authority. Stockland also has a Code of Conduct that applies to all employees and provides clear guidance on how we expect our people to act, engage and respond to each other and our stakeholders. Three Lines of Defence The Board provides overall oversight of Stockland’s risk management framework which is underpinned by the Three Lines of Defence. Further information on Stockland’s risk management framework is available at www.stockland.com.au/about-stockland/corporate-governance. External Audit Board & Committees Executive Committee FIRST LINE OF DEFENCE Leadership Team SECOND LINE OF DEFENCE THIRD LINE OF DEFENCE Risk, Compliance & Legal Functions Independent Audit function FIRST LINE OF DEFENCE The business and all employees FIRST LINE OF DEFENCE SECOND LINE OF DEFENCE THIRD LINE OF DEFENCE EXTERNAL AUDIT The business and all employees The business owns its risks and must ensure there are controls in place to appropriately manage the risk within our risk appetite Risk, Compliance and Legal function Develops risk management policies, systems, processes to promote consistent approach to risk management and provides independent review and challenge to ensure first line controls are appropriate Independent Audit function This function performed by EY, provides independent assurance on the effectiveness and efficiency of our controls and provides periodic reporting Provides regular independent assessment on the effectiveness of financial controls and processes in relation to the Group’s financial statements, governance disclosures and environmental and social performance reporting. Corporate Governance Framework The roles, responsibilities and accountabilities of the Board, Board Committees and Executive Committee are set out in the Board and Board Committee charters, which have been summarised below. Board Delegation Accountability Independence Assurance • External Audit • Internal Audit • Legal or other professional advice Board Committees n o i t a g e l e D t h g i s r e v O , e c n a r u s s A g n i t r o p e R h g u o r h t Chief Executive Officer / Managing Director Human Resources Risk Provide assurance on risk components of financial statements Provide assurance on remuneration components of financial statements Audit Sustainability The Board As set out in the Board Charter, the Board is responsible for: • Overseeing the development and implementation of Stockland’s corporate strategy, operational performance objectives and management policies with a view to creating sustainable long term value for securityholders • Overseeing the development and implementation of Stockland’s overall framework of governance, risk management, internal control and compliance which underpins the integrity of management information systems, financial reporting and fosters high ethical standards throughout Stockland • Appointing the Directors (subject to Stockland’s constitution), appointing the Managing Director, approving the appointment of the Company Secretary and Executive Committee members reporting to the Managing Director and determining the level of authority delegated to the Managing Director • Setting Executive remuneration policy, monitoring Executive Committee members’ performance and approving the performance objectives and remuneration of the Managing Director and his or her direct reports and reviewing Executive and Board succession planning and Board performance • Approving and monitoring the annual budget, business plans, financial statements, financial policies and financial reporting and major capital expenditure, acquisitions and divestitures • Determining and adopting dividend and distribution policies • Overseeing compliance with applicable laws and regulations • Appointing and monitoring the independence of Stockland’s external auditors. A copy of the Board Charter can be found on our website www.stockland.com.au/about-stockland/corporate-governance. The Board has delegated certain responsibilities to standing Committees which operate in accordance with the Committee Charters approved by the Board. Day to day management of the business is delegated to the Executive Committee through the Managing Director and Chief Financial Officer subject to approved authority limits and Board reserved matters. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 76 77 Year ended 30 June 2019Stockland Annual Report 2019 Board committees Four permanent Board Committees covering Audit, Risk, Human Resources and Sustainability have been established to assist in the execution of the Board’s responsibilities. The Board’s policy is that a majority of the members of each Board Committee are independent Directors. The Audit Committee, Human Resources Committee and Risk Committee comprise only independent Directors and the Sustainability Committee is chaired by an independent Director and has a majority of independent Directors. The Board reviews the composition of each Board Committee periodically, balancing the benefits of rotation with those of maintaining continuity of experience and knowledge, and to ensure Board Committee members have skills appropriate to their roles. Committee Chairs provide reports to the Board on key matters and Committee memberships provide for overlap of membership between the Audit Committee and Risk Committee as well as between the Risk Committee and Human Resources Committee. Current members of the Board Committees Audit Committee Stephen Newton Barry Neil Christine O’Reilly Andrew Stevens Human Resources Committee Melinda Conrad Tom Pockett Carol Schwartz Risk Committee Christine O’Reilly Stephen Newton Carol Schwartz Sustainability Committee Tom Pockett All Directors The Audit Committee is responsible for the oversight of the integrity of Stockland’s consolidated financial statements and disclosures, and the maintenance of a sound financial control environment. The purpose of the Audit Committee is to assist the Board to discharge its responsibilities for: • The integrity of Stockland’s financial reports and external audit • The appropriateness of Stockland’s accounting policies and processes • The effectiveness of Stockland’s financial reporting controls and procedures • The effectiveness of Stockland’s internal control environment • Compliance with Stockland’s Australian Financial Services Licences and Compliance Plans • Compliance with relevant laws and regulations including any prudential supervision procedures. The Human Resources Committee incorporates the functions of two board committees recommended by the ASX Guidelines: a Nominations Committee and a Remuneration Committee. The purpose of the Human Resources Committee is to consider and make recommendations to the Board on: • Tthe size, composition and desired competencies of the Board • Director independence, performance, remuneration and succession arrangements • The content of the annual remuneration report and remuneration details contained within other statutory reports, including financial statements • Stockland’s policies for employment, performance planning and assessment, training and development, promotion and people management. The purpose of the Risk Committee is to assist the Board to discharge its responsibilities in relation to: • Assessing the effectiveness of Stockland’s overall risk management framework • Supporting a prudent and risk aware approach to business decisions across Stockland. The Risk Committee reviews a wide range of matters relating to non-financial risk including work, health and safety, building quality, cyber security, insurance and business continuity. In FY19 the Risk Committee reviewed a number of risk policies including Stockland’s risk management framework. The purpose of the Sustainability Committee is to: • Cconsider the sustainability impacts of Stockland’s business activities including social, environmental and ethical impacts • Consider major corporate responsibility and sustainability initiatives and changes in policy • Approve specific external stakeholder communications • Approve external sustainability policies • Approve publicly disclosed targets and policies. Further information about our Board Committees can be found in the Committee Charters, which are available on our website www.stockland.com.au/about-stockland/corporate-governance. Stockland also operates a funds management platform with a separate Board and Committee structure for Stockland Capital Partners Limited and its unlisted fund. More detail on Stockland Capital Partners Limited is available on our website www.stockland.com.au/investor-centre/unlisted-property-funds. Board committee meetings The number of Board and standing Board Committee meetings held during the financial year that each Director was eligible to attend, and the number of meetings attended by each Director is set out in the table below: Scheduled Board Audit Committee Human Resources Committee Sustainability Committee Risk Committee A 14 14 14 10 14 13 14 14 6 B 14 14 14 10 14 14 14 14 6 A – 6 6 4 – – – 6 – B – 6 6 4 – – – 6 – A 5 – – – 5 5 – – 3 B 5 – – – 5 5 – – 3 A 1 2 2 1 2 2 2 2 – B 2 2 2 2 2 2 2 2 – A – – 4 3 2 5 – – – B – – 5 3 2 5 – – – Director Ms M Conrad Mr B Neil Mr S Newton Ms C O’Reilly1 Mr T Pockett2 Ms C Schwartz Mr M Steinert Mr A Stevens Former Director Ms C Hewson3 A – Meetings attended / B – Meetings eligible to attend 1 – Ms O’Reilly joined the Board on 23 August 2018. 2 – Mr Pockett attended two Risk Committee meetings as a member of the Committee while a vacancy was being filled in 2018. Ms O’Reilly joined the Risk Committee in August 2018. 3 – Ms Hewson retired from the Board at the conclusion of the Annual General Meeting on 24 October 2018. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 78 79 Year ended 30 June 2019Stockland Annual Report 2019 Board effectiveness Stockland is committed to having a Board whose members have the capacity to act independently of management, and have the collective skills and diversity of experience necessary to optimise the long-term financial performance of Stockland so as to deliver long-term sustainable profitable returns to securityholders. Board composition The Board currently comprises one Executive Director and seven Non-Executive Directors. The membership of the Board is reviewed periodically having regard to the ongoing and evolving needs of Stockland. The Board considers a number of factors when filling a vacancy including: Qualifications, skills and experience The right mix of skills and experience to enable it to deal with current and emerging risks and opportunities, and to effectively review and challenge the effectiveness of management. Independence The Board will comprise a majority of non-executive independent directors and the Chair of the Board must be an independent director. Tenure The Board balances longer-serving directors with a deep knowledge of Stockland’s business, policies and history, and newer directors with new perspectives and different but complementary experience. Diversity The Board recognises the benefits of diversity both across the organisation as well as in relation to Board composition. Independence criteria The Board regularly assesses the independence of each director in light of the interests that they have disclosed and such other factors as the Board determines are appropriate and in FY19 each Non-Executive Director satisfied the requirements for independence. The criteria applied to determine whether a director is independent is set out in the Board Charter available on our website www.stockland.com.au/about- stockland/corporate-governance. Female Non-Executive Directors 43% Board skills matrix The Board has identified a range of core skills and experience that will assist the Board collectively to fulfil its oversight role effectively. These include: • Experience with property investment and management • Property and community development • Construction and project management • Retailing and consumer marketing • Technology (including digital) • Industrial supply chain logistics • Funds management • Banking and finance • Government and regulatory relations • Environmental, social and governance matters • Strategy development • Significant senior executive experience. It is also advantageous for some Directors to have experience in the audit and risk management field, capital management, mergers and acquisitions, people management and executive remuneration. During FY19 the Board received various presentations and briefings on a range of topics tailored for professional development, key thematics for Stockland and the ongoing responsibilities of the Board. The Board believes that it has the right experience and skills currently to oversee the high standard of corporate governance, integrity and accountability required of a professional and ethical organisation as shown in the diagram below. The Board has a process for regularly evaluating its performance. With new Directors joining the Board in FY19 the regular external evaluation of the Board’s performance has been deferred until late calendar year 2019. Diversity of Board skills and experience Governance Previous Board experience Strategy Risk management Previous property Board experience 37.5% Property management and investment Property development Construction and project management Retail Industrial supply chain logistics Funds management Banking and finance Financial management Capital management Customer marketing including digital Technology Remuneration Workplace Health & Safety Sustainability Mergers and acquisitions Executive leadership 37.5% 50% 50% 50% 50% 50% 62.5% 62.5% 62.5% 62.5% 62.5% 62.5% 75% 75% 100% 100% 100% 100% 100% 100% I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 80 81 Year ended 30 June 2019Stockland Annual Report 2019 Tenure As at 30 June 2019, the tenure profile of the Board is shown in the below diagram. TENURE PROFILE 0-1 year = 1 Director 1-4 years = 2 Directors 4-10 years = 4 Directors 10+ = 1 Director The Board believes that it is important to maintain a range of director tenures to facilitate orderly Board renewal while maintaining valuable continuity and corporate knowledge among directors. In FY19 Ms Carolyn Hewson stepped down from the Board after nine years of service and both Ms Melinda Conrad and Ms Christine O’Reilly joined the Board. The Human Resources Committee oversees the Director nomination process, and will from time to time engage external search firms to ensure that a wide range of candidates are considered. Ultimately, the full Board determines who is invited to fill a casual vacancy after extensive one-on-one and collective interviews with candidates and thorough due diligence and reference checking. Written agreements setting out the terms of their engagement are entered into for all Directors and senior executives. Directors coming up for re-election are also reviewed by the Human Resources Committee and, in the Director’s absence, the Board considers whether to support their re-election. It is the Board’s policy that Directors offer themselves for re-election only with the agreement of the Board. Directors’ securityholdings Particulars of Securities held by Directors are set out in the Remuneration Report that forms part of this report. No options have been granted to Directors during the period. No proceedings No application has been made under section 237 of the Corporations Act 2001 in respect of Stockland, and there are no proceedings that a person has brought or intervened in on behalf of Stockland under that section. Our approach to tax Stockland’s tax strategy is to conduct all its tax affairs in a transparent, equitable and commercially responsible manner, whilst having full regard to all relevant tax laws, regulations and tax governance processes, to demonstrate good corporate citizenship. Consistent with the Board approved low tax risk appetite, Stockland maintains a low tax risk profile to ensure we remain a sustainable business and an attractive investment proposition, in both the short and long term. Tax control and governance policy framework Stockland maintains a Tax Control and Governance Framework (TCGF), reviewed and approved by the Audit Committee, which outlines the principles governing Stockland’s tax strategy and risk management policy. The TCGF is consistent with the guidelines published by the Australian Taxation Office (ATO) regarding tax risk management and governance processes for large business taxpayers. We undertake periodic reviews of the TCGF to test the robustness of the design of the framework against ATO benchmarks and to demonstrate the operating effectiveness of internal controls to stakeholders. The key principles of the TCGF are summarised as follows: • A tax strategy that ensures all tax affairs are conducted in a transparent, equitable and commercially responsible manner, whilst having full regard to all relevant tax laws, regulations and tax governance processes, to demonstrate good corporate citizenship • A balanced tax risk appetite that is consistent with the Board approved risk appetite, to ensure Stockland remains a sustainable business and a reputable and attractive investment proposition • A commitment to engage and maintain relationships with tax authorities that are open, transparent and co-operative, consistent with Stockland’s Code of Conduct and Ethical Behaviour policy • An operating and trading business based in Australia, with no strategic intentions of engaging in any tax planning involving the use of offshore entities or low-tax jurisdictions. Voluntary Tax Transparency Code As part of Stockland’s commitment to tax transparency and demonstrating good corporate citizenship, Stockland has adopted the Australian Federal Government’s Voluntary Tax Transparency Code (TTC), which provides a set of principles and minimum standards to guide medium and large businesses on public disclosure of tax information. Tax disclosures and information For information and detailed reconciliations of Stockland’s tax expense, effective tax rate and deferred tax balances please refer to notes 20 and 21 in the Financial Report. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 82 83 Year ended 30 June 2019Stockland Annual Report 2019 Tax contribution summary As Australia’s largest diversified property group, which owns, develops and manages commercial property assets, residential and retirement living communities, Stockland contributes to the Australia economy, through the various taxes levied at the federal, state and local government level. In FY19 these taxes totalled more than $252 million, and were either borne by Stockland as a cost of our business or collected and remitted as part of our broader contribution to the Australian tax system. The chart below illustrates the types of taxes that contributed to the taxes paid and/or collected and remitted for the 2019 tax year. TOTAL TAX CONTRIBUTION 35% Net GST Paid 28% PAYG Withholding 27% State Taxes (includes Land Tax and Payroll Taxes) 9.5% Other Duties and Levies 0.5% Fringe Benefit Tax Executive confirmations The Managing Director and the Chief Financial Officer have provided a written statement to the Board that: 1 With regard to the integrity of the financial statements of Stockland Corporation Limited (the “Company”) and its controlled entities and Stockland Trust (the “Trust”) and its controlled entities for the financial year, being the year ended 30 June 2019, that having made appropriate enquiries, in our opinion: a The financial records of the Company and the Trust and of the entities whose financial statements are required to be included in their respective consolidated financial statements (the consolidated entities) for the financial period, have been properly maintained in accordance with section 286 of the Corporations Act 2001 b The financial reports of the Company, the Trust and the respective consolidated entities, for the financial period, being the financial statements and notes thereto, comply with relevant accounting standards in accordance with section 296 of the Corporations Act 2001 and give a true and fair view of the financial position and performance of the Company, the Trust and the respective consolidated entities, in accordance with section 297 of the Corporations Act 2001. 2 With regard to the risk management and internal compliance and control systems of the Company, the Trust and the respective consolidated entities in operation for the year ended 30 June 2019, that having made appropriate enquiries to the best of our knowledge and belief: a The statements made in (1b) above regarding the integrity of the financial reports are founded on a sound system of risk management and internal compliance and control systems which, in all material respects, implement the policies which have been adopted by the Board of Directors either directly or through delegation to senior executives b The risk management and internal compliance and control systems are operating effectively, in all material respects, based on the risk management model adopted by the Company and Trust c While these statements are comprehensive in nature, they provide a reasonable but not absolute level of assurance about risk management and control systems and do not imply a guarantee against adverse events or more volatile outcomes occurring in the future d Nothing has come to our attention since 30 June 2019 that would indicate any material change to the statements made above. Associates and joint ventures, which the Company and Trust do not control, are not dealt with for the purposes of this statement, however management confirms that procedures are in place to assess the integrity of the financial information from these associates and joint ventures for the purposes of consolidating information into the financial accounts for the Company and the Trust. Corporate governance statement Stockland is committed to achieving and demonstrating the highest standards of corporate governance. Stockland has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd and 4th editions) published by the ASX Corporate Governance Council. The 2019 corporate governance statement is dated as at 30 June 2019 and reflects the corporate governance practices in place throughout the 2019 financial year. The 2019 corporate governance statement was approved by the Board on 21 August 2019. A description of Stockland’s current corporate governance practices is set out in Stockland’s corporate governance statement which can be viewed at www.stockland.com.au/about-stockland/corporate-governance. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y The Terraces, Bokarina Beach, QLD 84 85 Year ended 30 June 2019Stockland Annual Report 2019 Remuneration Report – audited The Board is pleased to present this Remuneration Report for Stockland for the year ended 30 June 2019 (FY19), which forms part of the Directors’ Report and has been audited in accordance with section 308(3C) of the Corporations Act 2001. The Remuneration Report covers Stockland and the Trust. At Stockland, the Human Resources Committee is responsible for recommending Senior Executive remuneration policies to the Board for its approval and is charged with reviewing Stockland’s remuneration policies each year to ensure that they remain fair and competitive when compared with those of companies of similar size, business mix and complexity in the property industry in Australia. There were no changes to the remuneration framework during FY19. We remain committed to an executive remuneration framework that supports Stockland’s objectives to deliver growth in FFO and total risk-adjusted securityholder returns above the average Australian Real Estate Investment Trust index, to create quality property assets and to deliver value for our customers. Stockland Shellharbour, NSW 1. Executive summary 1.1 Strategic priorities GROW ASSET RETURNS OPERATIONAL EXCELLENCE CAPITAL STRENGTH Strategic priorities • Accelerate improvement in the quality of our Retail Town Centre portfolio Increase Workplace and Logistics weighting • • Divest non-core Retirement Living villages Strategic priorities • Investing in and deepening our people’s capabilities Strategic priorities • Strategic capital partnerships across all sectors • Security buy-back FY19 outcomes • On track to exceed $400m retail non-core divestment target • Increased weighting of Workplace and Logistics to 23% • Divested three non-core Retirement Living Villages FY19 outcomes • Reshaped and aligned Executive leadership • Maintained strong employment engagement above Australian National Norm • Focus on evolving strong culture • Reduced unallocated overheads by $5 million FY19 outcomes • Confirmed strategic capital partnership at Aura, Sunshine Coast • Completed $192m of $350m security buy-back • Maintained A-/Stable credit rating FY19 key financials • Annual growth in funds from operations of 4% to $897m • FFO per security of 37.4cps, growth of 5.1% on FY18 1 Excludes Residential Communities workout projects. FY19 key financials • ROE of 11.9%1 • NTA per security of $4.04 • Distribution of 27.6 cps FY19 key financials • TSR over 3 years of 13.2% • CAGR in FFO per security over 3 years of 6.3% 1.2 What did our executives receive? • In FY19, there was no increase in the Fixed Pay for the Managing Director as the current level of Fixed Pay remains appropriate relative to market benchmarks. The Managing Director’s Fixed Pay has remained unchanged since commencing with Stockland in January 2013. There were also no changes to other Key Management Personnel (KMP) Fixed Pay. • Our considered approach to remuneration will continue in FY20 with no increases planned for the Fixed Pay of the Managing Director or any of our KMP. • A range of STIs against target was awarded to the Managing Director and KMP this year and awards are set out in section 3.3. The STIs awarded reflected a mixed performance against the Corporate Balanced Scorecard with a lower overall STI pool than FY18. As a result, the Managing Director and all Senior Executives were awarded STI an average of 85.7 per cent of target in FY19. Any individual STI award includes at least one-third (half for Managing Director) in the form of Stockland securities that vest in future years, subject to continued service by those executives and to Stockland’s clawback policy. • In relation to the LTI awards, the three year FFO per security Compound Annual Growth Rate (CAGR) of 6.3 per cent was above the minimum vesting threshold of 4.75 per cent set in FY17. Accordingly 94.2 per cent of the FFO per security component of the FY17 LTI award has vested. TSR over the three year performance period of 13.2 per cent was below the performance benchmark (a weighted index compromising of property companies from the ASX AREIT 200 index excluding Stockland) of 49.8 per cent and accordingly none of the TSR component of the FY17 LTI awards has vested. These combined outcomes resulted in the vesting of 47.1 per cent of FY17 LTI awards. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 86 87 Year ended 30 June 2019Stockland Annual Report 2019 2. Remuneration Framework 2.1 Framework Stockland’s remuneration policies are framed around several key principles, including: • Fixed Pay should be fair, competitive and regularly benchmarked against market practice. Fixed Pay includes salary, superannuation and other employee benefits. Annual reviews of Fixed Pay take into account each individual’s skills and experience relevant to their roles, internal and external benchmarks and the importance of a considered approach to pay. • A significant portion of executive remuneration should be ‘at risk’; that is awarded only if clear performance criteria set in advance are achieved • ‘At risk’ or variable pay should be aligned to securityholder interests • Variable pay as a portion of total remuneration should be higher for more senior executives • STIs must be affordable and funded from annual earnings • Individual STI awards are dependent on Stockland, business unit and individual performance measures based on the Corporate Balanced Scorecard approach which the Board uses to set financial and non-financial Key Performance Indicators (KPIs) that are aligned to overall business strategy and key priorities • A portion of performance based pay for Executives should be awarded as Stockland securities with deferred vesting with any above target performance for Senior Executives awarded fully as securities • Vesting of LTI should be dependent on exceeding long term performance hurdles • LTI should not only help motivate and retain Senior Executives but also build a sense of ownership of business performance that benefits all stakeholders • Remuneration policies and decisions must reflect adherence to Stockland’s values and Code of Conduct as well as prudent risk and capital management considerations • Unvested equity awards should be forfeited if employees resign during the applicable vesting period and should be subject to a broadly framed clawback policy that gives the Board discretion to adjust or forfeit these awards in certain circumstances • The Board retains the right to apply discretion over remuneration decisions taking into account both financial and non-financial outcomes. 2.2 Remuneration mix We reviewed our remuneration mix during the year and determined no changes needed to be made in FY19. The number of LTI rights awarded is based on the Volume Weighted Average Price of Stockland securities for the 10 working days post 30 June (face value methodology), which is consistent with the approach for determining the number of Deferred STI awards. Variable pay (STI and LTI) is a key component of remuneration for our Senior Executives. Generally, Stockland’s Senior Executives have a greater proportion of remuneration at risk than their counterparts in comparable property companies. MANAGING DIRECTOR & CEO OTHER SENIOR EXECUTIVES 25% Fixed Pay 12.5% Cash STI 12.5% Deferred ST 50% LTI k s i r t A A T R IS K – 67% 33% Fixed Pay 19% Cash STI 9% Deferred ST 39% LTI k s i r t A A T R IS K – 75% 88 The table below provides a summary of Stockland’s framework and how each component is determined. Principles and philosophy Remuneration component Measure At Risk Weighting Fixed Remuneration should be fair, competitive and regularly benchmarked to relevant market levels Fixed Pay (FP) Salary and other benefits (including statutory superannuation) External benchmarking based on surveys sourced from a number of organisations including AON Hewitt, Avdiev and PwC A significant portion of remuneration should be ‘at risk’ and fairly reward executives if pre-set objectives and hurdles are achieved and/ or exceeded and build a sense of business ownership and alignment that benefits all securityholders interests Short term Incentive (STI) 50% awarded as cash for performance up to target for Managing Director and CEO (two-thirds as cash for other Senior Executives) 50% awarded in deferred securities for performance up to target for Managing Director & CEO (one-third for Senior Executives) and 100% awarded as deferred securities for any performance above target Any deferred securities vest equally subject to continued service after 1 and 2 years Long Term Incentive (LTI) Delivered as Performance Rights measured against performance hurdles over a three year performance period Any rights then convert to deferred securities if performance hurdles are exceeded which vest equally subject to continued service after three and four years The number of LTI rights granted is based on the face value of Stockland’s securities at the time of the grant Values, Risk and Reputation The Board may apply discretion to adjust STI outcomes upwards or downwards including to zero where appropriate The Board can apply clawback on unvested deferred STI and/or LTI to adjust or forfeit these awards Minimum securityholding Target 100% of FP (Managing Director and CEO) 80 – 90% of FP (Other Senior Executives) Maximum 150% of Target Depends on company and individual performance reflecting progress against a Balanced Scorecard of Key Performance Indicators (KPIs) based on: • Business/Financial outcomes • Customer/Stakeholder and Sustainability performance • Leadership and People Management • Operational Excellence and Risk Management Managing Director and CEO 200% of FP Other Senior Executives 120% of FP Funds From Operations (FFO) Three year CAGR in FFO per security with maximum vesting if CAGR is 5% or more above the applicable target (50% weighting) and Total Shareholder Return (TSR) Based on a composite index reflecting A-REIT 200 competitors with maximum vesting occurring if Stockland’s TSR is 10% or more above this index (50% weighting) Our competitor index excludes Stockland and includes six A-REIT 200 large caps equally weighted at 13.33% each (Dexus, Goodman, GPT, Mirvac, Scentre and Vicinity) and eight A-REIT 200 smaller caps equally weighted at 2.5% (Abacus, BWP Trust, Charter Hall Group, Charter Hall Retail REIT, Cromwell Property, Growthpoint, National Storage REIT and Shopping Centres Australasia Property Group) The Managing Director and CEO is required to maintain a minimum holding of Stockland securities equivalent to at least two times fixed pay (one times fixed pay for other Senior Executives) for any securities granted after 1 July 2010 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 89 Year ended 30 June 2019Stockland Annual Report 2019 3. Remuneration outcomes 3.1 Financial performance over the past five years Underlying profit, FFO, EPS and other key financial performance measures over the last five years are set out below. Underlying profit1 ($M) FFO2 ($M) AFFO3 ($M) Statutory profit ($M) Security price as at 30 June ($)4 Distributions/Dividends per security (cents) Payout Ratio Securities bought back and cancelled ($M)5 Underlying EPS (cents) FFO per security (cents) AFFO per security (cents) Statutory EPS (cents) Stockland TSR – 1 year (%) A-REIT 200 TSR (excluding SGP) – 1 year (%) Tailored index TSR6 FY15 608 657 531 903 4.10 24.0 86% – 25.9 28.0 22.6 38.5 12.3 24.2 – FY16 FY17 660 740 624 889 4.71 24.5 79% – 27.8 31.1 26.3 37.4 16.4 21.1 – 696 802 687 1,195 4.38 25.5 77% – 29.0 33.4 28.6 49.8 7.1 (6.7) – FY18 731 863 756 1,025 3.97 26.5 75% – 30.2 35.6 31.2 42.3 (7.0) 11.5 7.2 FY19 757 897 780 311 4.17 27.6 74% 192 31.5 37.4 32.5 13.0 13.9 20.0 27.0 1 2 Underlying profit was the non-IFRS performance measure used in determining the non-TSR component of LTI remuneration for periods up to and including 30 June 2016. FFO is a non-IFRS measure that replaced underlying profit as Stockland’s primary reporting measure from FY17. This change recognises the importance of FFO in managing our business and the use of FFO as a comparable performance measurement tool in the Australian property industry. The reconciliation of FFO to statutory profit is provided in the Financial Report. Performance against this benchmark is set out in section 3.4. AFFO is stated exclusive of derivative close out costs and inclusive of Commercial Property and Retirement Living maintenance capex. 3 4 FY14 Closing security price was $3.88. 5 The securities were bought back on market. 6 Tailored AREIT 200 index comprised of six large companies forming 80% and eight smaller companies forming 20% as detailed in section 2.2. Measured from FY17 as a LTI hurdle. 3.2 Fixed pay We review Senior Executives’ Fixed Pay each year against independently-provided external data sources and market benchmarks from a group of ASX50 companies and larger property companies, ensuring that our Fixed Pay remains competitive with companies of comparable size and complexity in our industry. For the 2019 financial year, Fixed Pay did not increase for our Managing Director and CEO or the Senior Executives. 3.3 STI STI rewards the annual progress towards long-term objectives. All permanent employees employed at 30 June of the applicable financial year and who have greater than three months service are eligible to be considered for a STI award. STI pool The STI Pool is determined by the Board’s assessment of performance against the Corporate Balanced Scorecard, which is shown below for FY19. Corporate Balanced Scorecard FY19 Strategic priority KPI BUSINESS AND FINANCIAL PERFORMANCE (60%) Group and business unit performance Commentary Overall rating Group performance • Funds from Operations (FFO) per security • FFO per security growth was 5.1% to 37.4 cps • ROE was 11.5%1 guidance of 5.0 – 7.0% • Return on Equity1 (ROE) of 11.3 – 11.8% FFO at lower end of target range ROE within target range • Business Performance • Operating Business financial performance in line with plan • Maintain conservative debt profile and remain within policy limits for gearing, interest cover, asset mix, credit rating and debt profile • Credit rating maintain A- rating • Debt maturity profile >5 years • Liquidity buffer 10% above committed and undrawn facilities • Gearing within range 20 – 30% Business unit financial performance was mixed: • Commercial Property FFO of $623 million was up on FY18 and overall in line with forecast with Retail below and Workplace and Logistics above • Residential Operating Profit of $362 million was up on FY18 and above forecast • Retirement Living profit of $56 million was up on with FY18 but below forecast Within target range Upper end of target range Below target range • Average Debt Maturity was above 5 years • Credit Rating and liquidity buffer maintained with gearing and interest cover all within guidelines • Debt documentation and covenants updated and all covenants satisfied Within target range • Deliver against Key Business Priorities • Mixed progress against our key business and strategic priorities with most priorities met Lower end of target range 1 Including Residential workout projects. ROE was 11.9% excluding these projects. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 90 91 Year ended 30 June 2019Stockland Annual Report 2019 Corporate Balanced Scorecard FY19 Strategic priority KPI CUSTOMER AND ORGANISATIONAL PERFORMANCE (40%) Customer and stakeholder Commentary Overall rating • Achieve independent customer satisfaction • The customer satisfaction scores were generally Within target range ratings goals for each business unit at or above target • Commercial Property was above target • Residential outcomes variable against targets • Retirement Living was above People management • Achieve employee engagement target – 80% • Employee engagement score was 81% • Increase female participation across all levels of management • Women in management was 45.8% • Women in senior management was 42.0% • 37.0% of General Managers were females • 50% of Senior Executives were females Upper end of target range Within target range • Progress longer term diversity and inclusiveness objectives • Good progress made including being recognised as an Employer of Choice for Gender Equality over nine consecutive years (five with WGEA) Upper end of target range • 83.2% of employees having a flexible work arrangement Operational excellence, sustainability & risk management • Continued Process Improvement and • Over 1% of FFO due to new innovation Within target range enhanced innovation • Embed sustainable business practices • Recognised as the leading Global Real Estate Above target range and make good progress against environment improvement goals company in DJSI Sustainability Survey • Continued strong progress across our GHG and other sustainability targets • Ensure strong risk compliance and safety • Continued embedding of three lines of defence Within target management practices risk framework • Ongoing focus on contractor and employee safety management practices The maximum approved STI pool for all employees in FY19 was $28.7 million of which a maximum $6.6 million (or 20 per cent of the pool) is proposed to be awarded in Stockland securities with deferred vesting and is subject to the risk of forfeiture until vesting dates at the end of FY20 and FY21. $m Underlying profit FFO Cash STI1 DSTI STI pool 1 Includes applicable superannuation. FY15 608 657 24.0 9.0 33.0 FY16 660 740 28.1 8.9 37.0 FY17 696 802 28.4 9.5 37.9 FY18 731 863 26.6 6.6 33.2 FY19 757 897 22.1 6.6 28.7 STI outcomes – Managing Director and CEO and other KMP The table below sets out the STI awards for FY19. STI incentives are awarded in both cash and Stockland securities with deferred vesting. For amounts up to the Target STI awarded, the Managing Director and CEO receives one-half of STI in cash and one-half in deferred securities and Senior Executives receive two-thirds of STI in cash and one-third in deferred securities. Any STI above target is awarded as securities with deferred vesting. Half of the deferred STI securities vest 12 months after award with the remaining half vesting 24 months after award, provided employment continues to the applicable vesting date. Target STI (as % of Fixed Pay) Maximum STI (as % of Fixed Pay) STI Awarded (as % of Target) STI Awarded (as % of Maximum STI) STI paid in cash1 STI deferred into equity2 DSTIs granted3 Managing Director Mark Steinert Other KMP Katherine Grace Louise Mason Tiernan O’Rourke Andrew Whitson Former Senior Executives Stephen Bull4 % 100 80 90 80 90 90 % 150 120 135 120 135 135 % 80 94 87 86 91 49 % $ % $ % $ 53 600,000 50 600,000 50 134,145 63 58 58 61 301,333 392,000 403,333 408,667 67 67 67 67 150,667 196,000 201,667 204,333 33 62,000 100 – 33 33 33 33 – 33,686 43,821 45,088 45,684 – 1 The portion of STI awarded for the FY19 performance year, which is paid as cash. 2 The portion of STI awarded for FY19 performance that is deferred into Stockland securities that will vest over the next two years. 3 The number of securities granted for deferred STI is based on the Volume Weighted Average Price for the 10 business days after 30 June 2019. This price was $4.4728. 4 Ceased employment 7 September 2018. 100% of STI paid in cash. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 92 93 Year ended 30 June 2019Stockland Annual Report 2019 3.4 LTI Our LTI plan aims to align executive remuneration with securityholder returns and help retain our key talent. LTI awards are issued as performance rights granted under the Stockland Performance Rights Plan. Half of the LTI allocated to Senior Executives is linked to Stockland’s performance against underlying FFO growth targets, with the remaining half linked to a TSR performance hurdle. The tables below show Stockland’s performance against the respective FFO and TSR performance hurdles for the three years to 30 June 2019. Target/ benchmark performance Actual performance Out/(Under) performance % Vested Weight Vesting outcome 4.75% 6.3% 1.6% 94.2% 50% 47.1% Hurdle FFO per security for FY17 – 19 Compound Average Growth Rate1 TSR for FY17 – 19 3.5 Executive remuneration for FY19 Executives received a mix of remuneration during FY19 including Fixed Pay, STI awarded as cash and deferred securities and LTI awarded as performance rights. The table below outlines the cash remuneration that was received in relation to FY19 which includes Fixed Pay and the non-deferred portion of any FY19 STI. The table also includes the value of DSTI awards from FY17 and FY18 that vested during FY19 and LTI awards from FY17 that vested during FY19. This information differs from that provided in the remuneration for KMP set out in section 3.5(b) which was calculated in accordance with statutory rules and applicable Accounting Standards. A. Actual remuneration received or realised STI awarded and received as cash2 Fixed pay1 Total Cash payments in relation to financial year Previous years’ DSTI that were realised3 Previous years’ LTI that were realised3 Total Remuneration (received and/ or realised) Awards which lapsed or were forfeited4 Relative TSR FY17 – FY192 49.8% 13.2% (36.6%) –% 50% Vesting –% 47.1% $ Executive Director 1 For LTI awards made in FY17 and future years, the performance benchmark is growth in FFO per security. 2 Benchmark based on ASX AREIT 200 Index excluding Stockland. For LTI awards made in FY17 and future years, the TSR performance benchmark is a tailored index comprised of six large companies forming 80 per cent and eight smaller companies forming 20 per cent. LTI awarded for FY19 The performance rights that were awarded to the Managing Director and CEO and other Senior Executives under the Performance Rights Plan in FY19 are outlined in the table below. These awards are subject to a three year performance period (FY19 – FY21) with the awards measured against two performance hurdles: Relative TSR and FFO per security growth. As advised at the Annual General Meetings held in October 2018, the maximum vesting hurdle based on the Compound Annual Growth Rate for FFO per security for LTI awards granted during FY19 was 6.0 per cent (42.4 cps) for the three years from 1 July 2018 to 30 June 2021, with the threshold or minimum vesting hurdle being 4.25 per cent (40.3 cps). $ Grant date Vesting date1 LTIs Granted2 Fair value per LTI Fair Value of LTI3 Executive Director Mark Steinert 27/10/2018 27/10/2018 30/06/2021 30/06/2022 Senior Executives Other KMP4 Katherine Grace Louise Mason Tiernan O’Rourke Andrew Whitson 27/09/2018 27/09/2018 27/09/2018 27/09/2018 27/09/2018 27/09/2018 27/09/2018 27/09/2018 30/06/2021 30/06/2022 30/06/2021 30/06/2022 30/06/2021 30/06/2022 30/06/2021 30/06/2022 370,362 370,361 740,723 88,887 88,887 177,774 111,109 111,108 222,217 129,627 129,626 259,253 111,109 111,108 222,217 1.31 1.31 1.61 1.61 1.61 1.61 1.61 1.61 1.61 1.61 486,100 486,099 972,199 142,886 142,886 285,772 178,608 178,606 357,214 208,376 208,374 416,750 178,608 178,606 357,214 1 Vesting date refers to the date at which the performance and service conditions are met. The rights convert to securities subject to the three year performance period to 30 June 2020. Any rights that convert to securities then vest at the dates shown. The securities remain in holding lock until the 10th anniversary of the grant date except at Board discretion. The rights issued have an expiry date that is the later of the date of announcement of the FY21 results and 31 August 2021. 2 The number of rights granted is based on the Volume Weighted Average Price for the 10 business days after 30 June 2018. The price was $4.0501. 3 Fair value is determined using a Monte Carlo simulation (TSR hurdle) and the Black-Scholes option pricing model (FFO hurdle). Details of the assumptions made in determining fair value are discussed in note 19 of the financial statements. 4 Stephen Bull was not eligible for LTI awards during the year. Mark Steinert 2019 1,500,000 600,000 2,100,000 961,640 1,156,550 4,218,190 1,600,521 2018 1,500,000 702,000 2,202,000 1,014,208 1,326,726 4,542,934 1,711,320 Managing Director and CEO Other KMP Katherine Grace 2019 600,000 301,333 901,333 208,246 243,482 1,353,061 347,436 General Counsel and Company Secretary Louise Mason5 Group Executive and CEO, Commercial Property Tiernan O’Rourke Chief Financial Officer 2018 600,000 320,000 920,000 198,286 266,141 1,384,427 342,266 2019 2018 750,000 392,000 1,142,000 154,444 75,000 – 75,000 – – – 1,296,444 75,000 – – 2019 875,000 403,333 1,278,333 293,714 399,315 1,971,362 557,846 2018 875,000 420,000 1,295,000 314,229 451,345 2,060,574 581,847 Andrew Whitson 2019 750,000 408,667 1,158,667 428,622 346,965 1,934,254 480,163 2018 750,000 450,000 1,200,000 379,846 382,831 1,962,677 513,396 Group Executive and CEO, Stockland Communities 1 Fixed Pay includes salary, superannuation and salary sacrificed items. 2 For Mark Steinert this is 50 per cent (two thirds for Senior Executives) of his STI awards. The remaining 50 per cent of his STI (one third for Senior Executives) was deferred in Stockland securities which vests over two years following the performance year, 50 per cent after year 1 and 50 per cent after year 2 subject to continued employment. 3 This represents the value of all prior years’ deferred STI and LTI that vested during FY19 using the 30 June 2019 closing security price of $4.17. 4 The value shown represents the value of any previous years’ equity awards that lapsed or were forfeited during the financial year. The FY19 values are based on the closing 30 June 2019 security price of $4.17 (FY18: $3.97). 5 Louise Mason was appointed 4 June 2018. 94 95 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y Year ended 30 June 2019Stockland Annual Report 2019 8 7 6 5 4 3 2 1 I n c l u d e s a n y c h a n g e i n a c c r u a l s f o r l o n g s e r v i c e l e a v e . C a s h S T I s a r e e a r n e d i n t h e fi n a n c i a l y e a r i t o w h c h t h e y r e l a t e a n d a r e p a d i i n A u g u s t / S e p t e m b e r o f t h e f o l l o w n g fi n a n c i i a l y e a r . C o m p r i s e s s a l a r y p a c k a g e d b e n e fi t s , i i n c l u d n g m o t o r i v e h c l e c o s t s , c a r p a r k i n g , o t h e r s a l a r y s a c r i fi c e d i t e m s a n d F B T p a y a b l e o n t h e s e i t e m s . J o h n S c h r o d e r c e a s e d e m p l o y m e n t 2 J u l y 2 0 1 8 . S t e p h e n B u l l c e a s e d e m p l o y m e n t 7 S e p t e m b e r 2 0 1 8 . T e r m n a t i i o n p a y m e n t i n a c c o r d a n c e w i t h p o l i c y a s s e t o u t i n s e c t i o n 5 . 4 o f t h i s r e p o r t . L o u i s e M a s o n w a s a p p o n t e d 4 J u n e 2 0 1 8 . i O t h e r p a y m e n t s i n c l u d e p a y m e n t o n c o m m e n c e m e n t t o c o m p e n s a t e f o r i n c e n t i v e s f o r f e i t e d o n c e a s i n g p r e v i o u s e m p l o y m e n t t o j i o n S t o c k l a n d . A s n o t e d i n S e c t i o n 5 . 5 f o l l o w n g a r e v i i e w o f K e y M a n a g e m e n t P e r s o n a l a t t h e e n d o f F Y 1 8 , R o b y n E l l i o t t , D a r r e n R e h n , i M c h a e l R o s m a r i i n a n d S m o n S h a k e s h e ff w e r e n o l o n g e r c o n s i d e r e d a s K M P f r o m 1 J u l y 2 0 1 8 . S t e p h e n B u l l 6 F o r m e r K M P D a r r e n R e h n C h e f i I n v e s t m e n t O ffi c e r J o h n S c h r o d e r 8 F o r m e r C h e f i O p e r a t i n g O ffi c e r M i c h a e l R o s m a r i n 7 F o r m e r C E O , R e t i r e m e n t L i i v n g i S m o n S h a k e s h e ff 7 F o r m e r C E O , C o m m e r c i a l P r o p e r t y A n d r e w W h i t s o n R o b y n E l l i o t t i C h e f T e c h n o l o g y a n d I n n o v a t i o n O ffi c e r S e n i o r E x e c u t i v e s ( f o r m e r l y K M P ) 7 G r o u p E x e c u t i v e a n d C E O , S t o c k l a n d C o m m u n i t i e s I n c l u d e s a n y c h a n g e i n a c c r u a l s f o r a n n u a l l e a v e . C o n s o l i d a t e d r e m u n e r a t i o n F o r m e r G r o u p E x e c u t i v e , S t r a t e g y & S t a k e h o d e r R e l l a t i o n s i C h e f F n a n c i i a l o ffi c e r M a r k S t e i n e r t K a t h e r i n e G r a c e i M a n a g n g D i r e c t o r a n d C E O $ K e y M a n a g e m e n t P e r s o n n e l ( K M P ) T i e r n a n O R o u r k e ’ L o u i s e M a s o n 5 G e n e r a l C o u n s e l & C o m p a n y S e c r e t a r y G r o u p E x e c u t i v e a n d C E O , C o m m e r c i a l P r o p e r t y 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 2 0 1 8 2 0 1 9 5 8 8 , 5 7 1 – 1 , 0 3 4 , 7 6 0 – – – – – 5 6 8 , 3 0 0 1 2 , 4 2 2 6 3 3 , 2 9 9 1 4 3 , 5 3 8 – 7 3 6 , 4 9 2 1 3 2 , 1 9 7 – – 7 1 2 , 5 3 2 7 3 4 , 5 1 3 8 4 8 , 9 9 3 9 0 9 , 3 9 5 7 8 , 9 9 4 7 1 5 , 2 3 3 5 7 5 , 4 0 7 6 1 1 , 3 8 4 1 , 4 9 4 , 6 9 4 1 , 5 5 3 , 1 6 5 S a l a r y 1 1 2 , 4 2 2 2 , 6 6 3 – – – – – 1 2 , 4 2 2 1 3 , 8 4 9 – – 1 3 , 5 3 0 – – – – b e n e fi t s 2 m o n e t a r y N o n - – – – – – – – – – – – 2 0 1 8 7 , 4 0 4 , 2 3 9 2 0 1 9 4 , 6 6 7 , 2 2 8 3 8 , 2 2 2 3 0 , 0 4 2 2 0 9 , 2 5 2 3 , 8 8 3 , 7 3 3 1 1 , 5 3 5 , 4 4 6 9 4 3 2 , 1 6 7 , 3 3 3 6 , 8 6 5 , 5 4 6 2 9 3 , 3 3 3 8 8 1 , 9 0 4 – – 1 7 8 , 5 1 4 1 1 7 , 1 3 6 1 8 , 8 9 2 – 1 , 0 5 0 0 0 0 , 1 7 2 , 1 2 9 3 , 4 5 0 0 9 4 , 4 , 1 8 0 , 7 6 4 2 0 , 5 6 6 , 9 4 7 8 1 7 , 3 9 5 6 7 , 9 4 0 1 , 7 5 0 , 5 2 8 1 , 1 2 1 , 0 6 2 1 0 , 7 3 9 , 6 0 7 – – 8 , 0 2 9 2 2 6 , 2 7 8 3 0 4 , 7 6 4 1 , 4 3 9 , 8 6 7 – – – – , 6 0 0 0 0 0 1 , 6 3 4 , 7 6 0 1 9 , 2 7 8 1 , 0 5 0 0 0 0 , , 4 0 9 2 1 3 3 2 , 1 5 0 5 3 3 , 2 8 5 3 , 6 1 0 , 3 9 4 , 2 8 0 0 0 0 8 6 0 , 7 2 2 1 9 , 2 7 8 , 3 0 0 0 0 0 6 2 , 0 0 0 – 9 4 5 , 7 2 1 2 0 8 , 2 0 1 – 1 9 , 2 7 8 5 , 1 3 3 – – – – 8 1 7 , 3 9 5 ( 3 , 0 9 9 ) 1 4 8 , 8 3 3 1 6 0 , 5 7 8 1 , 3 3 7 , 0 4 1 – – – – 2 7 , 7 2 1 2 1 9 , 1 8 3 3 0 4 , 7 6 4 1 , 4 3 1 , 6 6 8 – – – – 2 1 , 9 8 5 2 7 3 , 9 3 3 3 5 2 , 1 1 4 1 , 6 1 3 , 0 3 1 – – – – 9 4 3 , 4 5 0 0 0 0 1 , 1 8 7 , 4 3 5 1 9 , 2 7 8 – – – 6 8 , 4 0 0 2 0 0 , 5 9 7 – – – – 1 , 8 8 7 , 4 5 0 0 0 0 1 , 1 7 6 , 8 4 1 – – 4 0 8 , 6 6 7 , 4 2 0 0 0 0 1 , 1 5 7 , 0 2 9 1 , 2 6 8 , 9 9 3 5 , 3 9 8 – – 1 9 , 2 7 8 1 9 , 7 4 2 1 9 , 2 7 8 9 4 3 4 0 3 , 3 3 3 1 , 3 1 3 , 6 7 1 2 4 , 6 9 3 9 4 3 7 0 2 , 0 0 0 2 , 1 9 7 , 6 3 7 , 3 2 0 0 0 0 3 0 1 , 3 3 3 8 9 5 , 4 0 7 9 1 2 , 7 1 7 1 9 , 2 7 8 1 9 , 7 4 2 1 9 , 2 7 8 – 6 0 0 , 0 0 0 2 , 1 5 3 , 1 6 5 2 5 , 0 0 0 3 9 2 , 0 0 0 1 , 1 2 0 , 7 6 3 2 2 , 8 2 6 9 5 6 2 0 5 , 4 7 9 – 2 8 5 , 4 2 9 – – – – – – – – – – – – – – – 9 , 2 0 5 3 4 2 , 6 6 7 3 7 7 , 6 6 7 1 , 9 3 6 , 2 5 2 – – – 1 7 , 3 3 3 – – – – – 2 2 3 , 3 2 8 – – 2 7 , 3 4 5 1 3 , 9 1 0 1 0 , 4 7 9 1 2 , 7 1 5 4 1 9 , 7 5 0 3 7 7 , 6 6 7 2 , 0 2 0 , 8 8 1 3 2 0 , 6 3 9 1 6 0 , 8 3 2 1 , 6 7 2 , 1 5 2 3 0 1 , 8 8 3 4 3 8 , 7 4 0 2 , 0 3 9 , 6 4 3 2 3 4 , 9 1 7 1 8 6 , 8 9 2 1 , 7 7 2 , 8 8 8 2 , 2 1 8 6 , 3 5 0 7 , 4 1 9 1 2 5 , 0 0 0 4 7 , 8 3 0 1 , 3 1 8 , 6 3 7 2 0 6 , 9 1 7 2 7 4 , 8 7 0 1 , 4 0 2 , 8 2 2 1 7 3 , 6 3 9 1 1 8 , 9 4 5 1 , 2 3 2 , 4 6 2 – 1 2 5 , 0 0 0 – 4 1 0 , 4 2 9 1 9 , 8 2 4 9 8 5 , 0 0 0 1 , 2 1 6 , 8 9 3 4 , 4 3 8 , 6 3 2 3 4 , 7 7 7 7 4 7 , 5 0 0 4 4 5 , 9 8 5 3 , 4 0 6 , 4 2 7 p a y m e n t s O t h e r C a s h S T I 3 s h o r t - t e r m b e n e fi t s b e n e fi t s T o t a l a n n u a t i o n T e r i m n a t i o n S u p e r - s e r v i c e l e a v e 4 L o n g D S T I L T I T o t a l B . E x e c u t i v e r e m u n e r a t i o n ( s t a t u t o r y p r e s e n t a t i o n ) S h o r t - t e r m P o s t - e m p l o y m e n t l o n g - t e r m O t h e r p a y m e n t s S h a r e d - b a s e d 5 6 . 0 4 6 . 9 5 7 . 3 4 0 . 6 5 6 . 2 – 5 7 . 4 2 7 . 8 – – 6 0 . 4 3 8 . 4 – – 6 1 . 7 5 3 . 2 5 6 . 9 4 6 . 5 3 0 . 5 4 2 . 8 5 7 . 2 4 8 . 2 6 5 . 4 5 2 . 7 3 7 . 1 2 6 . 7 3 6 . 9 2 4 . 0 3 6 . 6 3 8 . 8 2 3 . 1 – – – 3 7 . 2 7 . 8 – – 3 9 . 5 2 8 . 8 3 6 . 3 2 3 . 8 3 0 . 5 1 3 . 1 3 4 . 3 2 3 . 7 4 9 . 6 3 5 . 0 ( S T I + L T I ) o f T o t a l P e r c e n t % P e r c e n t o f ( D S T I + L T I ) T o t a l % P e r f o r m a n c e r e l a t e d 4. Non-Executive Director Remuneration 4.1 Directors’ fees Stockland’s remuneration policy for Non-Executive Directors aims to ensure Stockland can attract and retain suitably skilled, experienced and committed individuals to serve on the Board and remunerate them appropriately for their time and expertise and for their responsibilities and liabilities as public company directors. The Human Resources Committee is responsible for reviewing and recommending to the Board any changes to Board and Committee remuneration, taking into account the size and scope of Stockland’s activities, the responsibilities and liabilities of directors and the demands placed upon them. In developing its recommendations, the Committee may take advice from external consultants. With the exception of the Chairman, Non-Executive Directors receive additional fees for their work on Board committees. Where the Board establishes a special purpose Board Committee, Committee members may receive a fee in line with those paid for existing Board committees. Non-Executive Directors do not receive performance-related remuneration or termination benefits other than accumulated superannuation. In FY19, there were no changes in the base fees for the Chairman, Non-Executive Directors or any of the Board Committees. In FY20, in line with our considered approach to remuneration, there will be no changes in the base fees for the Chairman and Non-Executive Directors or for Board committee fees. Stockland Board Chairman Non-Executive Director Stockland Board Committees Audit Risk Human Resources SCPL Board Chairman Non-Executive Director Independent Non-Executive Director1 SCPL Board Committees Audit and Risk FY20 FY19 $500,000 $500,000 $175,000 $175,000 $40,000 $20,000 $35,000 $17,500 $35,000 $17,500 $32,700 $32,700 $30,000 $15,260 $8,720 $40,000 $20,000 $35,000 $17,500 $35,000 $17,500 $32,700 $32,700 $30,000 $15,260 $8,720 Chair Member Chair Member Chair Member Chair Member 1 Independent Non-Executive Directors of SCPL are those who are not on the Stockland Board. Total remuneration available to Non-Executive Directors is approved by securityholders and is currently $2,500,000 (including superannuation payments) as approved at the 2007 Annual General Meeting. No increase in the total fee pool is proposed for FY20. Total fees of $1,903,476 (76 per cent of the approved limit) were paid to Non-Executive Directors in FY19. This amount was 5.7 per cent higher than the total fees paid in FY18 due to the timing of new Non-Executive Directors being appointed and the retirement of former Non-Executive Directors. There were no changes to the base fees for Non-Executive Directors and Chairman or the respective Board Committees. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 96 97 Year ended 30 June 2019Stockland Annual Report 2019 The nature and amount of each element of remuneration for each Non-Executive Director is detailed below: $ Non-Executive Directors Tom Pockett Melinda Conrad2 Barry Neil Stephen Newton Christine O’Reilly3 Carol Schwartz Andrew Stevens Former Non-Executive Directors Carolyn Hewson4 Nora Scheinkestel5 Consolidated remuneration Short-term Post-employment Board and Committee Fees Non-monetary benefits Superannuation contributions Total1 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 479,469 479,951 202,725 19,266 207,945 207,945 260,718 243,985 170,110 – 205,699 191,781 178,082 178,082 60,452 191,781 – 157,534 1,765,200 1,670,325 – – – – – – – – – – – – – – – – – – – – 20,531 20,049 19,259 1,830 19,755 19,755 20,531 20,049 16,160 – 19,379 18,219 16,918 16,918 5,743 18,219 – 14,966 138,276 130,005 500,000 500,000 221,984 21,096 227,700 227,700 281,249 264,034 186,270 – 225,078 210,000 195,000 195,000 66,195 210,000 – 172,500 1,903,476 1,800,330 1 The fees for each Director are paid on a total cost basis, which includes any applicable compulsory superannuation (the amount of superannuation included in the total fees will vary depending on the timing of payments and in line with applicable legislation). 2 Melinda Conrad was appointed on 18 May 2018. 3 Christine O’Reilly was appointed on 23 August 2018. 4 Carolyn Hewson retired 24 October 2018. 5 Nora Scheinkestel retired 20 March 2018. 4.2 Directors’ securityholdings To align our Directors with securityholder interests, the Board believes that Directors should hold a meaningful number of Stockland securities. Each Non-Executive Director is required to acquire 40,000 securities within three years of commencing as a Non-Executive Director. This minimum equates to approximately one year’s base Board fees. The relevant interest of each Director in Stockland securities, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this Report are as follows: Non-Executive Directors Tom Pockett Melinda Conrad1 Barry Neil Stephen Newton Christine O’Reilly2 Carol Schwartz Andrew Stevens Executive Director Mark Steinert3 Stockland 2019 40,000 60,000 76,718 40,000 50,000 40,000 20,000 2018 40,000 – 76,718 40,000 50,000 40,000 20,000 3,162,815 2,654,856 1 Melinda Conrad was appointed 18 May 2018. 2 Christine O’Reilly was appointed 23 August 2018. 3 Includes vested DSTI securities and vested LTI rights held by the Executive Director. Excludes unvested DSTI and LTI rights as detailed in section 5.3 of this Report. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 98 99 Year ended 30 June 2019Stockland Annual Report 2019 5. Other remuneration information 5.1 Remuneration governance The Human Resources Committee assists the Board to exercise sound governance of its responsibility for the appointment, performance and remuneration of the Managing Director and CEO and Senior Executives. The Committee also oversees all employment and remuneration policies to ensure that, at all levels in the organisation, fairness and balance are maintained between reward, cost and value to Stockland whilst also reflecting risk and compliance performance assisted by the Audit and Risk Committees. The Committee approves the remuneration framework for all employees, including risk and financial control personnel and employees whose total remuneration includes a significant variable component. The Committee comprises of three independent Non-Executive Directors: Melinda Conrad (Chair), Carol Schwartz and Tom Pockett. The Committee commenced FY19 with four independent Non-Executive Directors with Ms Melinda Conrad replacing Ms Carolyn Hewson as Chair of the Committee following Ms Hewson’s retirement as a Non-Executive Director in October 2018. The roles and responsibilities of the Committee are outlined in the Committee’s charter, which is available on Stockland’s website at www.stockland.com.au/about-stockland/corporate-governance. 5.3 Stockland equity held by key management personnel The table below outlines the number of vested and ordinary holdings (personal) and unvested equity (DSTI and LTI) held by the Managing Director, other KMP and Non-Executive Directors as at the end of FY19. This table highlights the direct exposure that each KMP has to the Stockland security price. $ Non-Executive Directors Holding1 Balance 1 July 2018 Acquired/ (Disposed) or Granted Equity Incentives that lapsed Equity Incentives that vested2 Balance 30 June 2019 Maximum value yet to vest3 Mark Steinert Securities 2,654,856 – 317,274 134,145 – – 507,959 3,162,815 – (230,609) 220,810 467,000 1,509,244 740,723 (383,818) (277,350) 1,588,799 1,913,689 DSTI LTI Senior Executives Katherine Grace Securities DSTI LTI Louise Mason Securities DSTI LTI 204,418 70,309 342,327 – 74,073 – – (51,200) 33,686 177,774 – 43,821 222,217 – (83,318) – – – 108,328 (49,939) (58,389) 37,037 (37,037) – Non-Executive Directors Tom Pockett Melinda Conrad Barry Neil Stephen Newton Christine O’Reilly Carol Schwartz Andrew Stevens Securities 40,000 – Securities Securities Securities Securities Securities Securities – 60,000 76,718 40,000 – – – 50,000 40,000 20,000 – – – – – – – – – – – – – – – – 40,000 60,000 76,718 40,000 50,000 40,000 20,000 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 261,546 54,056 378,394 37,037 80,857 222,217 461,201 71,013 556,079 391,425 91,362 – 115,389 489,993 – 50,000 309,384 – 152,639 719,591 – 180,861 616,794 – – – – – – – 5.2 Use of remuneration consultants during the year Stockland seeks relevant benchmarking and commentary on a number of remuneration issues from a variety of consultants including EY. Stockland also subscribes to a number of independent salary and remuneration surveys, including property sector specific surveys run by AON Hewitt, Avdiev and PwC. During FY19, no remuneration recommendations in relation to key management personnel, as defined by Division 1 of Part 1.2 of Chapter 1 of the Corporations Act 2001, were made by these or other consultants. DSTI LTI Andrew Whitson Securities DSTI LTI 96,360 526,361 397,543 148,465 452,774 45,088 – (70,435) 259,253 (133,776) – (192,110) (95,759) 185,992 – (102,787) 45,684 222,217 (115,147) (83,205) 476,639 Tiernan O’Rourke Securities 482,607 – (187,600) 166,194 1 The DSTI awards are subject to either one or two years of continued service, and vest once this condition has been met, and are forfeited only if employment ceases. No DSTI awards were forfeited during the year. 2 The LTI that have vested at 30 June 2019 are yet to be exercised and converted to securities. 3 The maximum value of the LTI and DSTI yet to vest has been determined as the amount of the fair value of the rights that is yet to be expensed over the remaining vesting period. The minimum value of LTI and DSTI yet to vest is nil, as the securities are subject to performance hurdles being met and the risk of forfeiture until vesting dates. 100 101 Year ended 30 June 2019Stockland Annual Report 2019 5.4 Senior Executives’ employment and termination arrangements The Managing Director and CEO and other Senior Executives are on rolling contracts until notice of termination is given by either Stockland or the Senior Executive. The notice period for the Managing Director and CEO and other Senior Executives is six and three months, respectively. In appropriate circumstances, payment may be made in lieu of notice. Where Stockland initiates termination, including mutually agreed resignation, the Senior Executive would receive a termination payment of up to 12 months’ Fixed Pay (including applicable notice) and be considered for an STI award based on performance pro-rated for that proportion of the year they were employed. Where the termination occurs as a result of misconduct or a serious or persistent breach of contract (termination for cause), Stockland may terminate employment immediately without notice, payment in lieu of notice or any other termination payment. In cases of termination for cause or resignation, all unvested employee securities or rights lapse. In other circumstances, the Board has the discretion to adjust the vesting conditions. Typically, this discretion is applied as outlined below. Death or Total and Permanent Disablement For termination other than for cause or resignation Full vesting of any unvested equity awards. For unvested DSTI, full vesting in the year of termination. For LTI, unvested rights are vested pro rata based on service to the date of termination. Any applicable pro rata hurdled rights remain subject to the applicable performance hurdles over the full performance period. Any applicable restricted rights vest on 30 June in the year of termination. Other unvested LTI awards are forfeited. 5.5 Key management personnel Individuals who were KMPs of Stockland at any time during the financial year are as follows: Non-Executive Directors Mr Tom Pockett Ms Melinda Conrad Ms Carolyn Hewson (retired 24 October 2018) Mr Barry Neil Mr Stephen Newton Ms Christine O’Reilly (joined 23 August 2018) Ms Carol Schwartz Mr Andrew Stevens Executive Director Mr Mark Steinert Managing Director and Chief Executive Officer Senior Executives Ms Katherine Grace Group Executive and General Counsel and Company Secretary Ms Louise Mason Group Executive and CEO Commercial Property Mr Tiernan O’Rourke Group Executive and Chief Financial Officer Mr Andrew Whitson Group Executive and CEO Stockland Communities Former Senior Executives Mr Stephen Bull CEO Retirement Living (ceased employment 7 September 2018) Towards the end of FY18 a review was undertaken of the composition and structure of Stockland’s Executive Committee with the subsequent changes taking effect from 1 July 2018. The outcomes of this review led to the combining of the Residential and Retirement Living business units into a new Stockland Communities business unit led by Andrew Whitson (with Stephen Bull departing Stockland in September 2018 following a period of transition). In addition, the review resulted in the streamlining of Senior Executive participation in operational meeting and decision-making. Ms Robyn Elliott and Mr Darren Rehn remain employed by Stockland as members of the Executive Committee, but are no longer considered as KMP for the purposes of this report. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 102 103 Year ended 30 June 2019Stockland Annual Report 2019 Additional general information Indemnities and insurance of officers and auditor Since the end of the prior year, the Group has not indemnified or agreed to indemnify any person who is or has been an officer or an auditor of Stockland against any liability. Since the end of the prior year, the Group has paid insurance premiums in respect of Directors’ and Officers’ liability insurance contracts, for Directors, Company Secretaries and other Officers. Such insurance contracts insure against certain liabilities (subject to specified exclusions) for persons who are or have been Directors, Company Secretaries or other Officers of Stockland. Premiums are also paid for Fidelity insurance and Professional Indemnity insurance policies to cover certain risks for a broad range of employees, including Directors and Senior Executives. Non-audit services During the financial year the Group’s auditor, PwC, provided certain other services to the Group in addition to their statutory duties as auditor. The Board has considered the non-audit services provided during the financial year by the auditor and is satisfied that the provision of those services is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • The non-audit services were for taxation, regulatory, other advisory and assurance-related work closely linked to the Group’s audit, and none of this work created any conflicts with the auditor’s statutory responsibilities • The Audit Committee resolved that the provision of non-audit services during the financial year by PwC as auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 • The Board’s own review conducted in conjunction with the Audit Committee, having regard to the Board policy set out in this Report, concluded that it is satisfied the non-audit services did not impact the integrity and objectivity of the auditor; and the declaration of independence provided by PwC, as auditor of Stockland. Details of the amounts paid to the auditor of the Group, PwC, and its related practices for audit and non-audit services provided during the financial year are set out in note 33 of the accompanying financial statements. Lead Auditor’s Independence Declaration under section 307C of the Corporations Act 2001 The external auditor’s independence declaration is set out on page 105 and forms part of the Directors’ Report for the year ended 30 June 2019. Rounding off Stockland is an entity of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that Instrument, amounts in the Financial Report and Directors’ Report have been rounded to the nearest million dollars, unless otherwise stated. Signed in accordance with a resolution of the Directors: Tom Pockett Chairman Dated at Sydney, 21 August 2019 Mark Steinert Managing Director 104 Lead Auditor’s Independence Declaration Under section 307C of the Corporations Act 2001. Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of Stockland Corporation Limited and Stockland Trust for the year ended As lead auditor for the audit of Stockland Corporation Limited and Stockland Trust for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been: 30 June 2019, I declare that to the best of my knowledge and belief, there have been: Auditor’s Independence Declaration (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in As lead auditor for the audit of Stockland Corporation Limited and Stockland Trust for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been: (b) no contraventions of any applicable code of professional conduct in relation to the audit. (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Stockland Corporation Limited and the entities it controlled during the This declaration is in respect of Stockland Corporation Limited and the entities it controlled during the year and Stockland Trust and the entities it controlled during the year. year and Stockland Trust and the entities it controlled during the year. (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and relation to the audit; and relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Stockland Corporation Limited and the entities it controlled during the year and Stockland Trust and the entities it controlled during the year. Scott Hadfield Scott Hadfield Partner Partner PricewaterhouseCoopers PricewaterhouseCoopers Scott Hadfield Partner PricewaterhouseCoopers Sydney Sydney 21 August 2019 21 August 2019 Sydney 21 August 2019 PricewaterhouseCoopers, ABN 52 780 433 757 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 105 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y Year ended 30 June 2019Stockland Annual Report 2019 Financial report Bokarina Beach, QLD 106 107 Stockland Annual Report 2019Year ended 30 June 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossary Consolidated statement of comprehensive income Consolidated balance sheet Year ended 30 June $M Revenue Cost of property developments sold: • land and development • capitalised interest • utilisation of provision for impairment of inventories Investment property expenses Share of profits of equity-accounted investments Management, administration, marketing and selling expenses Net change in fair value of: • Commercial Property investment properties • Retirement Living investment properties • Retirement Living resident obligations Impairment of Retirement Living goodwill Net reversal of impairment of inventories Net gain/(loss) on other financial assets Net gain/(loss) on sale of other non-current assets Finance income Finance expense Net gain/(loss) on financial instruments Profit before tax Income tax benefit/(expense) Profit after tax Items that are or may be reclassified to profit or loss, net of tax Available for sale financial assets – net change in fair value Available for sale financial assets – reclassified to profit or loss Cash flow hedges – net change in fair value of effective portion Cash flow hedges – reclassified to profit or loss Other comprehensive income Total comprehensive income Basic earnings per share (cents) Diluted earnings per share (cents) Stockland Trust Note 1 2019 2,768 2018 2,775 2019 790 (1,252) (1,263) (93) 24 (270) 75 (332) (228) (72) 19 (38) 1 – (21) 4 (87) (140) 358 (47) 311 – – (5) (1) (6) 305 13.0 13.0 (106) 30 (264) 69 (318) 96 59 (73) – – 26 16 3 (77) (7) 966 59 1,025 2 (17) 23 (1) 7 1,032 42.3 42.2 – – – (260) 56 (42) (236) – – – – – (21) 284 (189) (140) 242 – 242 – – (5) (1) (6) 236 10.1 10.1 6 22 7 8 8 11 6 13 13 13 20 3 3 2018 781 – – – (252) 69 (38) 68 – – – – (1) 16 268 (192) (7) 712 – 712 – – 23 (1) 22 734 29.4 29.3 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. As at 30 June $M Cash and cash equivalents Receivables Inventories Other financial assets Other assets Non-current assets held for sale Current assets Receivables Inventories Investment properties – Commercial Property Investment properties – Retirement Living Equity-accounted investments Other financial assets Property, plant and equipment Intangible assets Deferred tax assets Other assets Non-current assets Assets Payables Borrowings Retirement Living resident obligations Development provisions Other financial liabilities Other liabilities Current liabilities Payables Borrowings Retirement Living resident obligations Development provisions Other financial liabilities Other liabilities Non-current liabilities Liabilities Net assets Issued capital Reserves Retained earnings/undistributed income Securityholders’ equity Note 14 9 6 16 12 9 6 7 8 22 16 11 21 10 15 8 6 16 10 15 8 6 16 19 Stockland Trust 2018 2019 2018 2019 140 208 1,005 9 95 1,457 171 1,628 94 2,500 9,145 3,990 612 525 57 193 40 215 17,371 18,999 696 343 333 98 715 12 103 1,261 65 1,326 99 2,750 9,563 4,120 613 282 53 194 88 203 17,965 19,291 810 240 2,496 2,577 343 2 68 3,948 147 4,361 101 370 218 26 5,223 9,171 9,828 8,657 91 1,080 9,828 567 33 107 4,334 173 3,698 164 356 163 27 4,581 8,915 10,376 8,850 101 1,425 10,376 63 41 – 9 81 194 171 365 215 22 – 12 80 329 22 351 3,580 3,363 – – 9,133 9,487 – 620 515 – – – 217 14,065 14,430 455 343 – – 2 29 829 – – 595 272 – – – 207 13,924 14,275 462 240 – – 33 43 778 – 4,361 3,698 – – 218 – 4,579 5,408 9,022 7,359 88 1,575 9,022 – – 163 – 3,861 4,639 9,636 7,538 98 2,000 9,636 108 109 The above consolidated balance sheet should be read in conjunction with the accompanying notes. Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Consolidated statements of changes in equity Attributable to securityholders of Stockland Attributable to securityholders of Trust Other reserves Note Issued capital Executive remuneration Cash flow hedge Fair value hedge Retained earnings Equity $M Balance at 1 July 2017 Profit for the year Other comprehensive income, net of tax Total comprehensive income Dividends and distributions Securities issued under DRP Expense relating to Security Plans, net of tax Acquisition of treasury securities Securities vested under Security Plans Securities lapsed under Security Plans Other movements Balance at 30 June 2018 4 19 31 19 19 Adoption of new accounting standards 35 Balance at 1 July 2018 Profit for the year Other comprehensive income, net of tax Total comprehensive income Dividends and distributions Expense relating to Security Plans, net of tax Acquisition of treasury securities Securities vested under Security Plans Securities lapsed under Security Plans Securities buy-back Other movements Balance at 30 June 2019 4 31 19 19 19 8,790 – – – – 67 – (20) 13 – 60 8,850 – 8,850 – – – – – (15) 14 – (192) (193) 8,657 40 – – – – – 15 – (13) (1) 1 41 – 41 – – – – 12 – (14) (2) – (4) 37 38 – 22 22 – – – – – – – 60 – 60 – (6) (6) – – – – – – – 54 15 – (15) (15) – – – – – – – – – – – – – – – – – – – – – 1,044 1,025 – 1,025 (645) – – – – 1 9,927 1,025 7 1,032 (645) 67 15 (20) – – (644) (583) 1,425 10,376 3 3 1,428 10,379 311 – 311 311 (6) 305 (661) (661) – – – 2 – (659) 12 (15) – – (192) (856) 1,080 9,828 $M Balance at 1 July 2017 Profit for the year Other comprehensive income, net of tax Total comprehensive income Dividends and distributions Securities issued under DRP Expense relating to Security Plans, net of tax Acquisition of treasury securities Securities vested under Security Plans Transfer of lapsed securities under Security Plans Other movements Balance at 30 June 2018 Adoption of new accounting standards Balance at 1 July 2018 Profit for the year Other comprehensive income, net of tax Total comprehensive income Dividends and distributions Expense relating to Security Plans, net of tax Acquisition of treasury securities Securities vested under Security Plans Securities lapsed under Security Plans Securities buy-back Other movements Balance at 30 June 2019 Other reserves Note Issued capital Executive remuneration Cash flow hedge Undistributed income Equity 7,480 – – – – 64 – (19) 13 – 58 7,538 – 7,538 – – – – – (15) 14 – (178) (179) 7,359 4 19 31 19 19 35 4 31 19 19 19 37 – – – – – 15 – (13) (1) 1 38 – 38 – – – – 12 – (14) (2) – (4) 34 38 – 22 22 – – – – – – – 60 – 60 – (6) (6) – – – – – – – 1,932 9,487 712 – 712 712 22 734 (645) (645) – – – – 1 (644) 2,000 (8) 64 15 (19) – – (585) 9,636 (8) 1,992 9,628 242 – 242 242 (6) 236 (661) (661) – – – 2 – 12 (15) – – (178) (659) (842) 54 1,575 9,022 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 110 111 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Consolidated statement of cash flow Notes to the financial statements Year ended 30 June $M Receipts in the course of operations (including GST) Payments in the course of operations (including GST) Payments for land Distributions received from equity-accounted investments Receipts from Retirement Living residents Payments to Retirement Living residents, net of DMF Interest received Interest paid Net cash flows from operating activities 27 Proceeds from sale of investment properties Payments for and development of investment properties: • Commercial Property • Retirement Living Payments for plant and equipment and software Proceeds from sale of/capital returns from investments Payments for investments (including equity-accounted) Distributions received from other entities Loans to related entities Net cash flows from investing activities On-market buy-back Payment for treasury securities under Security Plans Proceeds from borrowings Repayment of borrowings Payments for derivatives and financial instruments Dividends and distributions paid (net of DRP) Net cash flows from financing activities Net movement in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 19 19 27 27 4 Stockland Trust Note 2019 2,797 (1,805) 2018 3,055 (1,785) (496) 30 272 (150) 3 (201) 728 278 (463) (213) (58) 29 – 1 – (426) – (20) 2,510 (576) 51 295 (172) 4 (200) 394 329 (290) (149) (51) 25 (2) 1 – (137) (192) (15) 2,426 (1,969) (2,136) (1,969) (47) (653) (450) (193) 333 140 – (561) (207) 95 238 333 (47) (653) (436) (152) 215 63 2019 906 (430) – 32 – – 284 (200) 592 260 2018 917 (415) – 30 – – 268 (201) 599 260 (338) (464) – – – (2) 1 (229) (308) (178) (15) 2,426 – – – – 1 (92) (295) – (19) 2,510 (2,136) – (561) (206) 98 117 215 Contents Basis of preparation Group performance 114 116 Taxation 156 20. Income tax .....................................................................156 21. Deferred tax .................................................................... 157 1. Revenue ............................................................................ 116 2. Operating segments ........................................................ 118 Group structure 158 3. EPS ....................................................................................121 22. Equity-accounted investments ......................................158 4. Dividends and distributions .............................................122 23. Other arrangements ......................................................159 5. Events subsequent to the end of the year ........................122 24. Controlled entities ........................................................ 160 Operating assets and liabilities 123 6. Inventories ....................................................................... 123 7. Commercial properties ....................................................126 25. Deed of Cross Guarantee ...............................................163 26. Parent entity disclosures ...............................................164 Other items 165 8. Retirement Living ............................................................. 133 27. Notes to the consolidated statement of cash flow ........165 9. Receivables ...................................................................... 137 28. Contingent liabilities ......................................................166 10. Payables ......................................................................... 137 29. Commitments ................................................................166 11. Intangible assets .............................................................138 30. Related party disclosures ..............................................167 12. Non-current assets held for sale ....................................139 31. Personnel expenses ........................................................168 Capital structure and financing costs 140 32. Key management personnel disclosures .......................168 33. Auditor’s remuneration ..................................................169 13. Net financing costs ....................................................... 140 34. Accounting policies ........................................................169 14. Cash and cash equivalents ............................................. 141 35. Changes in accounting policies .......................................171 15. Borrowings ...................................................................... 141 16. Other financial assets and liabilities ...............................144 17. Fair value hierarchy .........................................................146 18. Financial risk factors .......................................................148 19. Issued capital .................................................................153 The above consolidated statement of cash flow should be read in conjunction with the accompanying notes. 112 113 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Basis of preparation IN THIS SECTION This section sets out the basis upon which the Group’s financial statements are prepared as a whole. Specific accounting policies are described in the section to which they relate. A glossary containing acronyms and defined terms is included at the back of this Report. Stockland represents the consolidation of Stockland Corporation Limited and its controlled entities and Stockland Trust and its controlled entities. Stockland Corporation Limited and Stockland Trust were both incorporated or formed and are domiciled in Australia. Stockland is structured as a stapled entity: a combination of a share in Stockland Corporation and a unit in Stockland Trust that are together traded as one security on the Australian Securities Exchange. The constitutions of Stockland Corporation Limited and Stockland Trust provide that, for so long as the two entities remain jointly quoted, the number of shares in Stockland Corporation Limited and the number of units in Stockland Trust shall be equal and that the shareholders and unitholders be identical. The stapling arrangement will cease upon the earlier of either the winding up of Stockland Corporation Limited or Stockland Trust or either entity terminating the stapling arrangement. The Financial Report as at and for the year ended 30 June 2019. BASIS OF PREPARATION These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Stockland Corporation Limited and Stockland Trust are both for- profit entities for the purpose of preparing the financial statements. As permitted by Class Order 13/1050, issued by ASIC, these financial statements are combined financial statements that present the financial statements and accompanying notes of both Stockland and Trust. The financial statements are presented in Australian dollars, which is Stockland Corporation Limited’s and Stockland Trust’s functional currency and the functional currency of the majority of Stockland and Trust’s subsidiaries. Historical cost convention The financial statements have been prepared on a going concern basis using historical cost conventions, except for investment properties (including non-current assets held for sale), derivative financial instruments, certain financial assets and liabilities which are stated at their fair value. Compliance with International Financial Reporting Standards The financial statements of both Stockland and Trust also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. New and amended Accounting Standards Stockland has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers on 1 July 2018. AASB 9 addresses the recognition, classification and measurement of financial assets and liabilities; derecognition of financial instruments; impairment of assets; and hedge accounting. AASB 15 contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time and over time. There have been no significant changes to the group’s financial performance and position as a result of the adoption of the new and amended accounting standards and interpretations. The impact of the adoption of these standards is disclosed in note 35. Rounding In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, amounts in the Financial Report have been rounded to the nearest million dollars, unless otherwise stated. Net current asset deficiency position Stockland and the Trust generated positive cash flows from operations of $394 million and $592 million respectively during the year. Undrawn bank facilities of $745 million (refer to note 15) are also available should they need to be drawn. In addition, Stockland and the Trust have the ability to refinance their existing external borrowings and raise new external debt if required. Based on the cash flow forecast for the next twelve months, Stockland and the Trust will be able to pay their debts as and when they become due and payable. Accordingly, the financial statements have been prepared on a going concern basis. Stockland and the Trust have prima facie net current assets deficiencies of $2,320 million and $464 million respectively at 30 June 2019 (2018: Stockland $3,008 million, Trust $427 million). STOCKLAND In relation to Stockland, a number of liabilities are classified as current under Accounting Standards that are not expected to result in actual net cash outflows within the next twelve months (in particular Retirement Living resident obligations). Similarly, some assets held as non-current will generate cash income in the next twelve months (including Retirement Living DMF included within Retirement Living investment properties, development work in progress and vacant stock). Furthermore, current inventories are held on the balance sheet at the lower of cost and net realisable value, whereas most of these are expected to generate cash inflows above the carrying value. In relation to current Retirement Living resident obligations for existing residents (2019: $2,490 million; 2018: $2,567 million), approximately 6% (2018: 7%) of residents are estimated to depart their dwelling each year and therefore it is not expected that the majority of the obligations to residents will fall due within one year. In the vast majority of transactions involving the turnover of units, the resident obligations will be repaid from receipts from incoming residents. However, resident obligations are classified as current under the definitions in the Accounting Standards as there is no unconditional contractual right to defer settlement for at least twelve months (residents may give notice of their intention to vacate their unit with immediate effect). In contrast, the corresponding Retirement Living assets are classified as non-current under the Accounting Standards as the majority are not expected to be realised within twelve months. TRUST The deficiency in the Trust primarily arises due to the intergroup loan receivable from the Company which is classified as a non-current asset. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed in this Financial Report. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Assumptions underlying management’s estimates of fair value and recoverability are: • Inventories – assumptions underlying net realisable value and profit margin recognition and Whole of Life (WOL) accounting – Note 6 • Commercial properties – assumptions underlying fair value – Note 7 • Retirement Living – assumptions underlying fair value – Note 8 • Goodwill – assumptions underlying recoverable value – Note 11 • Software – assumptions underlying recoverable value – Note 11 • Derivatives – assumptions underlying fair value – Note 16 • Valuation of security based payments – assumptions underlying fair value – Note 19 • Tax losses – assumptions underlying recognition and recoverability – Note 21 114 115 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Group performance IN THIS SECTION This section explains the results and performance of the Group. It provides additional information about those individual line items in the financial statements that the Directors consider most relevant in the context of the operations of the Group, including analysis of the result for the period by reference to key areas such as revenue and results by operating segment. 1. REVENUE Year ended 30 June 2019 $M Rental income1 Outgoings recoveries2 Rent from investment properties Property development sales3 DMF revenue1 Other revenue Revenue Amortisation of lease incentives Straight-lining of lease revenue Unrealised DMF revenue1 Segment revenue Year ended 30 June 2018 $M Rental income1 Outgoings recoveries2 Rent from investment properties Property development sales3 DMF revenue1 Other revenue Revenue Amortisation of lease incentives Straight-lining of lease revenue Unrealised DMF revenue1 Segment revenue Residential Retirement Living Communities sub-total Commercial Property Other Stockland Trust – – – 1,819 – 10 1,829 – – – 1,829 1 – 1 45 99 – 145 – – (26) 119 1 – 1 1,864 99 10 1,974 – – (26) 1,948 703 80 783 – – 10 793 71 (3) – 861 – – – – – 1 1 – – – 1 704 80 784 1,864 99 21 704 80 784 – – 6 2,768 790 71 (3) (26) 2,810 Residential Retirement Living Communities sub-total Commercial Property Other Stockland Trust – – – 1,830 – 8 1,838 – – – 1,838 – – – 16 107 – 123 – – (31) 92 – – – 1,846 107 8 1,961 – – (31) 1,930 700 80 780 22 – 11 813 62 (5) – 870 – – – – – 1 1 – – – 1 700 80 780 1,868 107 20 696 80 776 – – 5 2,775 781 62 (5) (31) 2,801 1 Commercial Property rental income and Retirement Living DMF revenue continue to meet the definition of a lease arrangement and fall outside the scope of AASB 15 and is therefore accounted for in accordance with AASB 117 Leases. 2 Revenue related to outgoing recoveries is recognised under AASB 15 over time in the accounting period in which the performance obligations are met. 3 Property development sales revenue is recognised under AASB 15 at a point in time when control of the asset passes to the customer. Rent from investment properties includes $4 million (2018: $5 million) contingent rents billed to tenants. Contingent rents are derived from the tenants’ revenues and represent 1% (2018: 1%) of gross lease income. Refer to note 2 for disclosures related to Stockland reportable segments. A. Disaggregation of revenue from property development sales Residential revenue from property development by major product and geographical area is disaggregated as follows: Year ended 30 June 2019 $M Residential community Apartments Medium density development Property development sales Year ended 30 June 2018 $M Residential community Apartments Medium density development Property development sales NSW 476 – 159 635 NSW 498 – 112 610 QLD 468 40 30 538 QLD 553 – 34 587 VIC 468 – 24 492 VIC 407 – 30 437 WA 147 – 7 154 WA 189 – 7 196 Residential 1,559 40 220 1,819 Residential 1,647 – 183 1,830 PROPERTY DEVELOPMENT SALES Revenue from land and property sales is recognised when control over the property has been transferred to the customer. The properties have generally no alternative use for the Group due to contractual restrictions. However, an enforceable right to payment does not arise until legal title, and therefore control of the asset, has passed to the customer. Therefore, revenue is recognised at a point in time when legal title, and therefore control of the asset, has passed to the customer. RENT FROM INVESTMENT PROPERTIES Rent from investment properties includes lease revenue and outgoings recoveries associated with general building and tenancy operation from lessees in accordance with specific clauses within lease agreements. Lease revenue is recognised on a straight-line basis over the lease term, net of any incentives. Outgoing recoveries are typically invoiced monthly based on an annual estimate. The consideration for the current month is typically due on the first day of the month. Revenue related to outgoings recoveries is recognised over time as the estimated costs are consumed by the tenant. Should any adjustment be required based on actual costs incurred, this is recognised in the balance sheet within the same reporting period and billed annually. DEFERRED MANAGEMENT FEE (DMF) REVENUE The DMF is recognised over the tenancy period and includes both fixed fees recognised on a straight-line basis and contingent fees recognised when earned. The DMF calculated on the entry price of the unit is recognised each period; however, fees are only realised in cash at the end of the residents tenure. The DMF calculated on the exit price of the unit is recognised and realised in cash at the end of the resident’s tenure. DIVIDENDS AND DISTRIBUTIONS Revenue from dividends and distributions are recognised in profit or loss on the date they are declared by the relevant entity but are only recognised in the statement of cash flows upon receipt. 116 117 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 2. OPERATING SEGMENTS STOCKLAND Stockland has four reportable segments, as listed below: • Commercial Property – invests in, develops and manages retail town centres, logistics and workplace properties; • Residential – delivers a range of masterplanned and mixed use residential communities in growth areas and townhouses and apartments in general metropolitan areas; • Retirement Living – designs, develops and manages communities for over 55s and retirees; and • Other – dividends/distributions from strategic investments and other items which are not able to be classified within any of the other defined segments. Together, Residential and Retirement Living represent Stockland’s Communities business. Measurement of segment results FFO is a non-IFRS measure that is designed to present, in the opinion of the Chief Operating Decision Maker (CODM), the results from ongoing operating activities in a way that appropriately reflects the Group’s underlying performance. FFO is the primary basis on which dividends and distributions are determined and together with expected capital returns and AFFO impacts, reflects the way the business is managed and how the CODM assesses the performance of the Group. It excludes costs of a capital nature and profit or loss made from realised transactions occurring infrequently and those that are outside the course of Stockland’s core ongoing business activities. FFO also excludes income tax items that do not represent cash payments. A reconciliation from FFO to profit after tax is presented in note 2.B. AFFO is an alternative, secondary, non-IFRS measure used by the CODM to assist in the assessment of the underlying performance of the Group. AFFO is calculated by deducting maintenance capital expenditure and incentive and leasing costs from FFO. There is no customer who accounts for more than 10% of the gross revenues of Stockland. TRUST The Trust has one reportable segment in which it operates, being Commercial Property. Therefore no separate segment note has been prepared. The CODM monitors the performance of the Trust in a manner consistent with that of the financial statements. Refer to the consolidated statement of comprehensive income for the segment financial performance and the consolidated balance sheet for the total assets and liabilities. There is no customer who accounts for more than 10% of the gross revenues of the Trust. A. FFO and AFFO The contribution of each reportable segment to FFO and AFFO may be summarised as follows: Year ended 30 June 2019 $M Segment revenue1,2 Segment EBIT1,2 Amortisation of lease fees Interest expense in cost of sales Segment FFO3 Finance income Finance expense Unallocated corporate and other expenses FFO Maintenance capital expenditure4 Incentives and leasing costs5 AFFO Year ended 30 June 2018 $M Segment revenue1,2 Segment EBIT1,2 Amortisation of lease fees Interest expense in cost of sales Segment FFO3 Finance income Finance expense Unallocated corporate and other expenses FFO Maintenance capital expenditure4 Incentives and leasing costs5 AFFO Residential Retirement Living Communities sub-total Commercial Property Other Stockland 1,829 455 – (93) 362 119 62 – (6) 56 1,948 517 – (99) 418 861 607 16 – 623 1 – – – – 2,810 1,124 16 (99) 1,041 4 (87) (61) 897 (47) (70) 780 Residential Retirement Living Communities sub-total Commercial Property Others Stockland 1,838 435 – (99) 336 92 56 – (3) 53 1,930 491 – (102) 389 870 607 14 (7) 614 1 – – – – 2,801 1,098 14 (109) 1,003 3 (77) (66) 863 (51) (56) 756 1 Commercial Property segment revenue and EBIT adds back $71 million (2018: $62 million) of amortisation of leases incentives and excludes $3 million (2018: $5 million) of straight-line rent adjustments. 2 Retirement Living segment revenue and EBIT exclude $26 million (2018: $31 million) of unrealised DMF revenue. 3 Commercial property segment FFO includes share of profits from equity-accounted investments of $30 million (2018: $29 million). 4 Maintenance capital expenditure includes $9 million (2018: $7 million) of Retirement Living maintenance capital expenditure. 5 Excludes centres under development. 118 119 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 B. Reconciliation of FFO to profit after tax FFO excludes adjustments such as unrealised fair value gains/losses, realised transactions occurring infrequently and those that are outside the course of our core ongoing business activities. 3. EPS KEEPING IT SIMPLE EPS is the amount of post-tax profit attributable to each security. Basic EPS is calculated as statutory profit for the year divided by the weighted average number of securities outstanding. This is highly variable as it includes unrealised fair value movements in investment properties and financial instruments. Diluted EPS adjusts the basic EPS for the dilutive effect of any instruments, such as Security Plan rights, that could be converted into securities. Basic FFO per security is disclosed in note 4 and more directly reflects underlying income performance of the portfolio. A. Basic and diluted EPS Year ended 30 June $M Basic EPS Diluted EPS B. Earnings used in calculating earnings per share Year ended 30 June $M Profit attributable to securityholders Stockland Trust 2019 13.0 13.0 2018 42.3 42.2 2019 10.1 10.1 2018 29.4 29.3 Stockland Trust 2019 311 2018 1,025 2019 242 2018 712 C. Weighted average number of securities used as the denominator Year ended 30 June Shares Stockland and Trust 2019 2018 Weighted average number of securities used in calculating basic EPS 2,400,974,898 2,424,182,812 Effect of rights and securities granted under Security Plans 3,154,024 5,371,202 Weighted average number of securities used in calculating diluted EPS 2,404,128,922 2,429,554,014 Rights and securities granted under Security Plans are only included in diluted earnings per security where Stockland is meeting performance hurdles for contingently issuable security based payment rights. Year ended 30 June ($M) FFO Adjust for: Amortisation of lease incentives and lease fees Straight-line rent Net unrealised change in fair value of Commercial investment properties Net unrealised change in fair value of Retirement Living investment properties & obligation Unrealised DMF Revenue Net gain/(loss) on financial instruments Net gain/(loss) other financial assets Net gain/(loss) on sale of other non-current assets Net reversal of impairment of inventories Impairment of Retirement Living goodwill Restructuring cost Income tax – non-cash Profit after tax Footnote A B C D 2019 897 (87) 3 (202) (76) 26 (140) – (21) 1 (38) (5) (47) 311 2018 863 (76) 5 133 (25) 31 (7) 26 16 – – – 59 1,025 A Includes Stockland’s share of revaluation relating to properties held through joint ventures (2019: $24 million gain; 2018: $40 million gain). B Reversal of write down of carrying value of Residential projects. C Write-down of goodwill associated with historic Retirement Living acquisitions. D One-off restructuring cost associated with the significant Executive reorganisation this year to improve operational efficiencies and position the business for sustainable growth in the future. C. Balance sheet by operating segment Year ended 30 June 2019 $M Real estate related assets1,2 Other assets Assets Retirement Living resident obligations Borrowings Other liabilities Liabilities Net assets/(liabilities) Year ended 30 June 2018 $M Real estate related assets1,2 Other assets Assets Retirement Living resident obligations Borrowings Other liabilities Liabilities Net assets/(liabilities) Residential Retirement Living Communities sub-total Commercial Property Unallocated Stockland 3,411 164 3,575 – – 951 951 2,624 4,037 85 4,122 2,597 – 20 2,617 1,505 7,448 249 7,697 2,597 – 971 3,568 4,129 10,323 57 10,380 – – 157 157 36 886 922 – 4,704 742 5,446 10,223 (4,524) 17,807 1,192 18,999 2,597 4,704 1,870 9,171 9,828 Residential Retirement Living Communities sub-total Commercial Property Unallocated Stockland 3,432 102 3,534 – – 1,385 1,385 2,149 4,167 93 4,260 2,741 – 11 2,752 1,508 7,599 195 7,794 2,741 – 1,396 4,137 3,657 10,562 46 10,608 – – 148 148 10,460 37 852 889 – 3,938 692 4,630 (3,741) 18,198 1,093 19,291 2,741 3,938 2,236 8,915 10,376 Includes non-current assets held for sale, inventories, investment properties, equity-accounted investments and certain other assets. 1 2 Includes equity-accounted investments of $612 million (2018: $588 million) in Commercial Property and $nil (2018: $25 million) in Residential. 120 121 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 4. DIVIDENDS AND DISTRIBUTIONS STOCKLAND CORPORATION LIMITED There was no dividend from Stockland Corporation Limited during the current or the previous financial year. The dividend franking account balance as at 30 June 2019 is $14 million based on a 30% tax rate (2018: $14 million). TRUST For the current year, the interim and final distributions are paid solely out of the Trust and therefore the franking percentage is not relevant, as the Trust is not subject to tax. Trust Date of payment Cents per security Amount ($M) Non attributable (%) 2019 2018 Interim distribution 28 February 2019 28 February 2018 Final distribution 30 August 2019 31 August 2018 Total distribution 2019 13.5 14.1 27.6 2018 2019 2018 13.0 13.5 26.5 325 336 661 316 329 645 2019 21.9 28.4 2018 21.9 21.9 The non-attributable component represents the amount distributed in excess of the Stockland Trust’s taxable income (disregarding any Capital Gains Tax discount applied to any capital gains derived by Stockland Trust in the year). BASIS FOR DISTRIBUTION Stockland’s distribution policy is to pay the higher of 100 per cent of Trust taxable income or 75 – 85 per cent of FFO over time. The payout ratio for the current and comparative periods may be summarised as follows: Year ended 30 June $M FFO1 Weighted average number of securities used in calculating basic EPS FFO per security Distribution per security for the year Payout ratio Note 2 3 4 2019 897 2018 863 2,400,974,898 2,424,182,812 37.4 27.6 74% 35.6 26.5 75% 1 FFO is a non-IFRS measure. A reconciliation from FFO to statutory profit is presented in note 2 and the statutory EPS disclosure is provided in note 3. For FY19, payout ratio is marginally below target range mainly due to changes in weighted average number of securities. 5. EVENTS SUBSEQUENT TO THE END OF THE YEAR STOCKLAND AND TRUST On 4 July 2019, Stockland announced a capital partnership agreement for its Aura project with Capital Property Group (CPG). CPG has invested a 50 per cent interest in the project at approximately 30 per cent premium to book value. The Aura project, which is located in the Sunshine Coast, comprises a total of 12,697 remaining lots of which 226 have been sold (not settled). The project also includes medium/high density residential super lots for up to 4,000 units, approximately 136.5 ha of business parks, retail centre sites and educational sites. Following completion, the project will be accounted for as a joint operation. Accordingly Stockland will recognise in its financial statements its share of the assets, liabilities, revenue and expense of this joint arrangement. Subsequent to the end of the year, contracts were also exchanged for the following transactions: • sale of Stockland Cammeray, Cammeray NSW for a gross consideration1 of $39 million; • sale of Stockland Jesmond, Newcastle NSW for a gross consideration1 of $118 million; • sale of the Group's 50% interest in the The King Trust for a gross consideration1 of $340 million; and • acquisition of the remaining 50% Stockland Piccadilly, 133-145 Castlereagh Street, Sydney NSW for a gross consideration1 of $347 million. Other than disclosed elsewhere in this report, there has not arisen in the interval between the end of the current financial year and the date of this report any item, transaction or event of a material or unusual nature, likely, in the opinion of the Directors, to affect significantly the operations, the results of operations, or the state of the affairs in future years of Stockland and the Trust. 1 Consideration before completion adjustments such as committed capital expenditures, incentives, rental guarantees and/or net working capital. Operating assets and liabilities IN THIS SECTION This section shows the real estate and other operating assets used to generate the Group’s trading performance and the liabilities incurred as a result. 6. INVENTORIES KEEPING IT SIMPLE Whole of Life (WOL) A Whole of Life (WOL) methodology is applied to calculate the margin percentage over the life of each project. All costs, including those costs spent to date and those forecast in the future, are allocated proportionally in line with net revenue for each lot to achieve a WOL margin percentage. The WOL margin percentage and therefore allocation of costs can change as revenue and costs forecast are updated to reflect market conditions not previously forecasted, and as projects proceed towards completion. The determination of the WOL margin percentage requires significant judgement in estimating future revenues and costs. The WOL margin percentages are regularly reviewed and updated in our project forecasts across the reporting period to ensure these estimates reflect market conditions through the cycle. 30 June $M Cost of acquisition Development and other costs Interest capitalised Impairment provision Finished development stock held for sale1 Cost of acquisition Development and other costs Interest capitalised Impairment provision Residential communities Cost of acquisition Development and other costs Interest capitalised Impairment provision Apartments Cost of acquisition Development and other costs Interest capitalised Impairment provision Logistics Cost of acquisition Development and other costs Interest capitalised Impairment provision Aspire villages Development work in progress Inventories Stockland 2019 2018 Current Non-current Total Current Non-current Total 95 291 37 (12) 411 354 137 93 (21) 563 10 6 1 – 17 5 1 1 – 7 2 5 – – 7 – – – – – 95 291 37 (12) 411 1,665 2,019 486 290 (107) 2,334 101 4 1 – 106 54 6 1 (9) 52 3 5 – – 8 623 383 (128) 2,897 111 10 2 – 123 59 7 2 (9) 59 5 10 – – 15 594 1,005 2,500 3,094 2,500 3,505 38 115 21 (2) 172 326 156 49 (16) 515 – – – – – 10 – 1 – 11 4 12 1 – 17 543 715 – – – – – 1,957 475 350 (147) 2,635 65 10 1 – 76 19 4 1 (9) 15 7 16 1 – 24 38 115 21 (2) 172 2,283 631 399 (163) 3,150 65 10 1 – 76 29 4 2 (9) 26 11 28 2 – 41 2,750 2,750 3,293 3,465 1 Mainly comprises residential communities. Current finished development stock held for sale includes Logistics projects of $3 million (2018: $2 million) and Aspire villages of $30 million (2018: $5 million). No apartments are included in finished development stock held for sale (2018: $nil). 122 123 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 The following impairment provisions are included in the inventories balance with movements for the year recognised in the profit or loss: ALLOCATION OF INVENTORIES TO COST OF SALES $M Balance at 1 July 2018 Amounts utilised Reversal of provisions previously recognised Additional provisions created Balance at 30 June 2019 DEVELOPMENT COST PROVISIONS Residential Communities Apartments Logistics Aspire villages Total 165 (24) (5) 4 140 – – – – – 9 – – – 9 – – – – – These provisions are recorded as a separate liability on the balance sheet with a corresponding asset in inventories: 30 June $M 2019 Current Non-current Development costs provision 343 370 2018 Total 713 Current Non-current 567 356 Balance at 1 July 2018 Additional provisions Amounts utilised Balance at 30 June 2019 174 (24) (5) 4 149 Total 923 $M 923 422 (632) 713 A Whole of Life (WOL) methodology is applied to calculate the margin percentage for each project. All costs, including those costs spent to date and those forecast in the future, are allocated proportionally in line with net revenue for each lot to achieve a WOL margin percentage. The WOL margin percentage and therefore allocation of costs can change as revenue and cost forecasts are updated to reflect changing market conditions not previously forecasted, and as projects proceed towards completion. IMPAIRMENT PROVISION The net realisable value of inventories is the estimated selling price in the ordinary course of business less estimated costs of completion and costs to sell. Net realisable value is based on the most reliable evidence available at the time of the amount the inventories are expected to be realised (using estimates such as revenue escalations) and the estimate of total costs (including costs to complete). These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. This is an area of accounting estimation and judgement for the Group. Each reporting period, key estimates are reviewed including the costs of completion, dates of completion and revenue escalations. For the year ended 30 June 2019, a net impairment reversal of $1 million was recognised (2018: $nil) as a result of this review. DEVELOPMENT COST PROVISIONS The development cost provisions relate to obligated future costs. They are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Properties held for development and resale are stated at the lower of cost and net realisable value. Cost includes the costs of acquisition, development and holding costs such as borrowing costs, rates and taxes. Holding costs incurred after completion of development activities are expensed. Inventory is classified as current if it is expected to be settled within 12 months or otherwise classified as non-current. COST OF ACQUISITION The cost of acquisition comprises the purchase price of the land, including land under option, along with any direct costs incurred as part of the acquisition including legal, valuation and stamp duty costs. The payments for land of $576 million (2018: $496 million) reported in the cash flow statements are in respect of land that will be developed in the short term as well as long term. LAND UNDER OPTIONS Stockland has a number of arrangements with third parties primarily relating to the purchase of land on capital efficient terms, through call or put and call option arrangements. Where the arrangement uses call options only, the decision to proceed with a purchase is controlled by Stockland. A future obligation under a call option is only triggered if Stockland exercises the option. No asset or liability for the land under option is recognised on the balance sheet until the option has been exercised. The call option is not disclosed as a capital commitment as there is no commitment to purchase until the option is exercised. Where the arrangement includes both put and call options and the put option requires Stockland to purchase the land at the discretion of the seller, it creates a present obligation once the option is exercised by the holder. If Stockland also presently exhibits control over the future economic benefits of the asset such as via a presently exercisable call option or physical control of the asset, the land is recognised in inventories with a corresponding liability recognised in provisions for development costs at the exercise price of the option. For both put and call options, any costs incurred in relation to the options including option fees are included in inventories. DEVELOPMENT AND OTHER COSTS Cost includes variable and fixed costs directly related to specific contracts, costs related to general contract activity which can be allocated to specific projects on a reasonable basis, and other costs specifically chargeable under the contract including under rectification provisions. INTEREST CAPITALISED Financing costs on qualifying assets are also included in the cost of inventories. Finance costs were capitalised at interest rates ranging from 4.0 to 5.0% during the financial year (2018: 5.0 to 5.6%). 124 125 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 7. COMMERCIAL PROPERTIES As at 30 June $M Retail Town Centres Logistics Workplace Retirement Living1 Capital works in progress and sundry properties Book value of commercial properties Less amounts classified as: • costs to complete provision • property, plant and equipment • non-current assets held for sale Stockland Trust 2019 2018 2019 6,726 7,282 6,724 2018 7,233 2,537 2,229 2,537 2,229 891 20 190 867 10 208 925 – 133 871 – 111 10,364 10,596 10,319 10,444 (42) (43) (171) – (42) – (43) (65) (171) (22) – – • other assets (including lease incentives and fees) • other assets (including lease incentives and fees) attributable to equity-accounted investments • other receivables (straight-lining of rental income) • other receivables (straight-lining rental income) attributable to equity-accounted investments Investment properties (including Stockland’s share of investment properties held by equity-accounted investments) (273) (263) (280) (270) (5) (74) (10) (6) (72) (11) (5) (77) (10) (6) (75) (11) 9,746 10,136 9,734 10,060 Less: Stockland’s share of investment properties held by equity-accounted investments (601) (573) (601) (573) Investment properties 9,145 9,563 9,133 9,487 1 The investment property balance at 30 June 2019 includes $20 million of healthcare and childcare centre commercial properties held by the Retirement Living business (2018: $10 million) to be leased to tenants under commercial leases. NET CARRYING VALUE MOVEMENTS $M Balance at 1 July Acquisitions Expenditure capitalised Transfers to non-current assets held for sale Transfers to inventories Disposals Net change in fair value Balance at 30 June Stockland Trust 2019 2018 2019 9,563 9,285 9,487 2018 9,186 7 415 (22) – 7 421 (64) (10) 10 309 (171) – (172) (266) (167) 96 (236) 68 9,145 9,563 9,133 9,487 17 260 (171) (29) (267) (228) Stockland $M Directly owned Stockland Green Hills, East Maitland NSW Stockland Shellharbour, Shellharbour NSW1 Stockland Wetherill Park, Western Sydney NSW Stockland Merrylands, Merrylands NSW Stockland Rockhampton, Rockhampton QLD Stockland Glendale, Newcastle NSW Stockland Point Cook, Point Cook VIC Stockland Burleigh Heads, Burleigh Heads QLD2 Stockland Baldivis, Baldivis WA Stockland Cairns, Cairns QLD Stockland Hervey Bay, Hervey Bay QLD Stockland Townsville, Townsville QLD (50%)2, 3 Stockland The Pines, Doncaster East VIC Stockland Wendouree, Wendouree VIC Stockland Forster, Forster NSW Stockland Balgowlah, Balgowlah NSW Stockland Baulkham Hills, Baulkham Hills NSW Stockland Bundaberg, Bundaberg QLD Stockland Gladstone, Gladstone QLD Stockland Caloundra, Caloundra QLD4 Stockland Jesmond, Newcastle NSW Stockland Nowra, Nowra NSW Stockland Traralgon, Traralgon VIC Stockland Bull Creek, Bull Creek WA Stockland Birtinya, QLD2 Stockland Tooronga, Tooronga VIC5 Stockland Harrisdale Complex, Harrisdale WA Shellharbour Retail Park, Shellharbour NSW Stockland Cammeray, Cammeray NSW North Shore Townsville, Townsville QLD Stockland Townsville Kingsvale Sunvale, Aitkenvale QLD (50%)3, 9 Dec-18 Stockland Cleveland, Cleveland QLD6 Stockland Kensington, Kensington QLD6 Stockland Bathurst, Bathurst NSW6 Stockland Highlands, Craigieburn VIC6, 7 Woolworths Toowong, Toowong QLD8 Owned through equity-accounted investments – – – – – Independent valuation Independent valuers’ capitalisation rate % Book value Date $M 2019 2018 2019 2018 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Dec-18 Dec-18 Jun-19 Jun-19 Jun-19 Jun-19 Jun-19 Dec-18 Jun-19 Jun-19 Dec-18 Jun-19 Jun-19 Jun-18 Dec-18 Jun-19 Jun-19 Jun-19 820 727 722 573 359 330 238 5.50 5.50 5.25 5.50 6.00 6.00 6.50 5.75 5.50 5.25 5.50 6.00 5.75 6.25 191 6.50 – 7.00 6.50 – 7.00 190 183 185 183 180 180 177 154 151 146 130 132 118 121 95 88 69 62 58 65 38 17 5 – – – – – 6.25 6.50 6.50 5.88 6.50 6.50 5.75 – 6.50 5.75 – 6.50 6.25 6.50 6.25 6.00 6.50 6.50 6.75 6.25 7.50 6.50 7.00 6.75 6.00 – 6.25 6.00 6.50 7.00 6.75 7.00 5.75 – – – – – 6.00 6.50 6.25 5.50 6.00 6.50 6.75 5.75 7.00 6.00 6.50 6.50 – 6.00 6.25 7.00 6.00 6.50 – 6.00 6.25 6.75 6.00 n/a 821 727 722 573 359 330 238 191 190 183 185 183 185 181 177 154 151 146 130 110 118 121 96 88 67 62 57 65 38 17 2 – – – – – 807 776 768 578 383 339 254 215 204 194 189 191 184 182 173 170 160 151 137 146 140 130 102 99 – 62 57 56 49 20 2 120 31 98 43 6 126 127 Stockland Riverton, Riverton WA (50%) Dec-18 62 6.50 6.25 Retail Town Centres10 Independent valuation excludes the adjacent property owned by Stockland. 1 2 A range of cap rates is disclosed for a complex comprising of a number of properties. 3 Stockland’s share of this property is held through a direct interest in the asset. 4 Stockland South, Caloundra QLD was sold during the period. 5 Asset held for sale at year end. 6 Property was disposed of during the period. 7 Property is not held by the Trust. 8 Asset has been reclassified to inventories. 9 Independent valuation based on 100% ownership. 10 Totals may not add due to rounding. 62 6,726 66 7,282 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Stockland $M Directly owned Yennora Distribution Centre, Yennora NSW Triniti Business Park, North Ryde NSW Ingleburn Logistics Park, Ingleburn NSW 60-66 Waterloo Road, Macquarie Park NSW1 Brooklyn Distribution Centre, Brooklyn VIC Hendra Distribution Centre, Brisbane QLD Coopers Paddock, Warwick Farm NSW Mulgrave Corporate Park, Mulgrave VIC Port Adelaide Distribution Centre, Port Adelaide SA2 Forrester Distribution Centre, St Marys NSW Granville Industrial Estate, Granville NSW1 Oakleigh Industrial Estate, Oakleigh South VIC Somerton Distribution Centre, Somerton VIC1 Macquarie Technology Business Park, Macquarie Park NSW1 Balcatta Distribution Centre, Balcatta WA Altona Distribution Centre, Altona VIC1, 3 16 Giffnock Avenue, Macquarie Park NSW Altona Industrial Estate, Altona VIC 23 Wonderland Drive, Eastern Creek NSW Willawong Industrial Estate, QLD 72-76 Cherry Lane, Laverton North VIC Wetherill Park Distribution Centre, Wetherill Park NSW Smeg Distribution Centre, Botany NSW Erskine Park, Erskine Park NSW 40 Scanlon Drive, Epping VIC2 Export Distribution Centre, Brisbane Airport QLD4 M1 Yatala Enterprise Park, Yatala QLD Owned through equity-accounted investments Independent valuation Independent valuers’ capitalisation rate % Book value Date $M 2019 2018 2019 2018 Jun-19 Dec-18 Dec-18 Dec-18 Jun-19 Jun-19 Dec-18 Dec-18 Dec-18 Dec-18 Dec-18 Dec-18 Jun-19 Jun-18 Dec-18 Dec-18 Jun-19 Jun-19 Jun-19 Jun-19 Dec-18 Jun-19 Dec-18 Dec-18 Jun-19 Jun-19 Jun-18 Jun-18 475 212 184 6.00 6.00 6.00 6.50 6.50 6.50 117 6.00 – 6.37 6.25 – 6.75 122 114 102 93 80 76 73 68 63 59 56 59 64 50 47 38 33 33 32 28 12 6 6 6.00 7.00 6.00 7.00 10.00 7.00 6.75 7.50 5.75 7.00 9.25 6.75 6.25 – 6.75 6.50 – 7.00 6.00 6.25 7.00 6.75 – 7.25 6.63 – 7.50 6.63 – 7.50 7.00 6.75 6.00 6.25 – 7.25 7.00 6.00 6.00 7.00 6.00 6.00 5.00 5.00 6.00 11.00 n/a 6.75 7.50 6.25 – 6.50 6.50 5.50 5.75 7.00 11.20 n/a 475 212 184 116 122 114 99 95 78 76 74 67 63 59 56 59 64 50 47 38 33 33 32 28 13 7 6 402 198 104 107 106 98 97 94 85 81 67 62 62 59 55 55 55 37 42 – 32 29 28 24 10 7 6 Optus Centre, Macquarie Park NSW (51%) Jun-19 240 6.00 6.50 Logistics5 1 A range of cap rates are disclosed for a complex comprising of a number of properties. 2 Asset held for sale at year end. 3 Includes 11-25 Toll Drive transferred to asset held for sale at year end. 4 Property is a leasehold property. 5 Totals may not add due to rounding. 240 2,537 230 2,229 Stockland $M Directly owned Independent valuation Independent valuers’ capitalisation rate % Book value Date $M 2019 2018 2019 2018 Stockland Piccadilly, 133-145 Castlereagh Street, Jun-19 342 5.25 – 6.00 5.50 – 6.00 309 280 Sydney NSW (50%)1, 2, 3, 4, 5 601 Pacific Highway, St Leonards NSW Durack Centre, 263 Adelaide Terrace, Perth WA1,2 110 Walker Street, North Sydney NSW 40 Cameron Avenue, Belconnen ACT2, 6 80-88 Jephson Street, Toowong QLD6, 7 23-29 High Street, Toowong QLD6, 7 Owned through equity-accounted investments Dec-18 Jun-19 Dec-18 – – – 119 108 45 – – – 6.00 7.75 – 8.25 5.75 – – – 6.50 8.00 6.25 11.75 6.50 – 8.00 6.50 – 8.00 135 King Street, Sydney NSW (50%)1, 4 Dec-18 313 4.00 – 5.00 4.00 – 5.00 Workplace8 117 108 45 – – – 313 891 103 108 37 22 17 7 295 867 1 A range of cap rates is disclosed for a complex comprising of a number of properties. 2 Property is a leasehold property. 3 Stockland’s share of this property is held through a direct interest in the asset. 4 Book value includes the retail component of the property. 5 The book value excludes the revaluation relating to the area occupied by Stockland. This owner-occupied area is classified as property, plant and equipment and is recognised at historical cost. 6 Property was disposed of during the period. 7 Property is not held by the Trust. 8 Totals may not add due to rounding. INVESTMENT PROPERTIES Commercial properties comprise investment interests in land and buildings including integral plant and equipment held for the purpose of producing rental income, capital appreciation, or both. Commercial properties are initially recognised at cost including any acquisition costs and subsequently stated at fair value at each balance date. Fair value is based on the latest independent valuation adjusted for capital expenditure and capitalisation and amortisation of lease incentives since the date of the independent valuation report. Any gain or loss arising from a change in fair value is recognised in the profit or loss in the period. The valuation of Commercial properties is a key area of accounting estimation and judgement for the Group. Commercial properties under development are classified as investment properties and stated at fair value at each balance date. Fair value is assessed with reference to reliable estimates of future cash flows, status of the development and the associated risk profile. Finance costs incurred on properties undergoing development or redevelopment are included in the cost of the development. As at 30 June 2019, the fair value for commercial properties in development has been assessed by the Directors after considering the latest valuations and subsequent capital works-in-progress. An independent valuation of the property will be undertaken upon completion of the works. A property interest under an operating lease is classified and accounted for as an investment property on a property-by-property basis when Stockland holds it to earn rentals or for capital appreciation or both. Any such property interest under a financing lease classified as an investment property is carried at fair value. SUBSEQUENT COSTS Stockland recognises in the carrying amount of an investment property the cost of replacing part of that investment property if it is probable that the future economic benefits embodied within the item will flow to Stockland and the cost can be measured reliably. All other costs are recognised in the profit or loss as an expense as incurred. 128 129 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 LEASE INCENTIVES Key inputs used to measure fair value for commercial properties are: Lease incentives provided by Stockland to lessees, and rental guarantees which may be received by Stockland from third parties (arising from the acquisition of investment properties) are included in the measurement of fair value of investment property and are treated as separate assets. Such assets are amortised over the respective periods to which the lease incentives and rental guarantees apply using a straight-line basis. If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment and its fair value at the date of reclassification becomes its cost for accounting purposes. DISPOSAL OF REVALUED ASSETS The gain or loss on disposal of revalued assets is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal and is recognised in the profit or loss in the year of disposal. FAIR VALUE MEASUREMENT, VALUATION TECHNIQUES AND INPUTS The adopted valuations (both internal and external) for investment properties in the Retail Town Centres, Logistics and Workplace portfolios are a combination of the valuations determined using the Discounted Cash Flow (DCF) method and the income capitalisation method. The adopted value of properties in the properties under development portfolio is based on an internal tolerance check performed by the Directors at each reporting date. The tolerance check takes into account the expected cost of completion, the stage of completion, the risk associated with the project, expected underlying income and applying the income capitalisation method. The following table shows the valuation techniques used in measuring the fair value of commercial properties excluding assets held for sale, as well as significant unobservable inputs used. Class of property Retail Town Centres Fair value hierarchy Valuation technique Level 3 DCF and income capitalisation method Inputs used to measure 2019 2018 Net market rent (per sqm p.a.) $193 – 736 $197 – 794 10 year average specialty market rental growth 2.3 – 3.8% 3.1 – 3.9% Adopted capitalisation rate Adopted terminal yield Adopted discount rate 4.0 – 7.5% 4.0 – 7.0% 4.3 – 7.8% 4.3 – 7.8% 6.3 – 8.0% 6.8 – 8.3% Logistics Level 3 DCF and income capitalisation method Net market rent (per sqm p.a.) $54 – 465 $54 – 456 10 year average market rental growth 2.4 – 4.0% 2.4 – 3.9% Adopted capitalisation rate 5.0 – 10.3% 5.5 – 11.2% Adopted terminal yield Adopted discount rate 5.25 – 13.1% 5.5 – 13.7% 6.75 – 9.5% 7.0 – 9.5% Workplace Level 3 DCF and income capitalisation method Net market rent (per sqm p.a.) $389 – 947 $364 – 889 10 year average market rental growth 3.0 – 3.9% 2.7 – 4.0% Adopted capitalisation rate Adopted terminal yield Adopted discount rate 5.0 – 8.1% 5.0 – 8.0% 5.4 – 8.3% 5.4 – 8.5% 6.6 – 8.4% 6.6 – 7.5% Properties under development Level 3 Income capitalisation method Net market rent (per sqm p.a.) $78 – 429 $96 – 731 Adopted capitalisation rate 6.25 – 6.5% 5.5 – 7% Item DCF method Description Under the DCF method, a property’s fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. The DCF method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of the income stream associated with the real property. Income capitalisation method This method involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value, with allowances for capital expenditure reversions. Net market rent 10 year average specialty market rental growth 10 year average market rental growth Adopted capitalisation rate Adopted terminal yield Adopted discount rate VALUATION PROCESS A net market rent is the estimated amount for which a property or space within a property should lease between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and wherein the parties have each acted knowledgeably, prudently and without compulsion. In a net rent, the owner recovers outgoings from the tenant on a pro-rata basis (where applicable). An average of a 10 year period of forecast annual percentage growth rates in Retail specialty tenancy rents. Specialty tenants are those tenancies with a gross lettable area of less than 400 square metres (excludes ATMs and kiosks). The expected annual rate of change in market rent over a 10 year forecast period in alignment with expected market movements. The rate at which net market income is capitalised to determine the value of a property. The rate is determined with regards to market evidence and the prior external valuation. The capitalisation rate used to convert income into an indication of the anticipated value of the property at the end of the holding period when carrying out the DCF method. The rate is determined with regards to market evidence and the prior external valuation. The rate of return used to convert a monetary sum, payable or receivable in the future, into present value. It reflects the opportunity cost of capital, that is, the rate of return the capital can earn if put to other uses having similar risk. The rate is determined with regards to market evidence and the prior external valuation. The Commercial Property valuation team are responsible for managing the bi-annual valuation process across Stockland’s balance sheet investment portfolio. The aim of the valuation process is to ensure that assets are held at fair value in Stockland’s accounts and facilitate compliance with applicable regulations (for example the Corporations Act 2001 and ASIC regulations) and the STML Responsible Entity Constitution and Compliance Plan. Stockland’s external valuations are performed by independent professionally qualified valuers who hold a recognised relevant professional qualification and have specialised expertise in the investment properties valued. Internal tolerance checks have been performed by Stockland’s internal valuers who hold recognised relevant professional qualifications. INTERNAL TOLERANCE CHECK An internal tolerance check is performed every six months with the exception of those properties being independently valued during the current reporting period. Stockland’s internal valuers perform tolerance checks by utilising the information from a combination of asset plans and forecasting tools prepared by the asset management teams. For the Retail Town Centres, Workplace and Logistics classes, appropriate capitalisation rates, terminal yields and discount rates based on comparable market evidence and recent external valuation parameters are used to produce a capitalisation and DCF valuation. The internal tolerance check is generally weighted equally between the capitalisation value (50% weighting) and the DCF valuation (50% weighting). The current book value, which is the value per the asset’s most recent external valuation plus any capital expenditure since the valuation date, is compared to the internal tolerance check. • If the internal tolerance check is within 5.0% of the current book value, then the current book value is retained, and judgement is taken that this remains the fair value of the property. • If the internal tolerance check varies by more than 5.0% to the current book value (higher or lower), then an external independent valuation will be undertaken and adopted after assessment by the Commercial Property valuation team to provide an appropriate level of evidence to support fair value. The internal tolerance checks are reviewed by Commercial Property senior management who recommend the adopted valuation to the Audit Committee and Board in accordance with Stockland’s internal valuation protocol above. 130 131 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 A development feasibility is prepared for each commercial property under development. The feasibility includes an estimated valuation upon project completion based on the income capitalisation method. During the development period, fair value is assessed by reference to the value of the property when complete, less deductions for costs required to complete the project and appropriate adjustments for profit and risk. The fair value is compared to the current book value. • If the internal tolerance check is within 5.0% of the current book value, then the current book value is retained, and judgement is taken that this remains the fair value of the property under development. • If the internal tolerance check varies by more than 5.0% to the current book value (higher or lower), then an internal valuation will be adopted with an external valuation obtained on completion of the development. EXTERNAL VALUATIONS The STML Responsible Entity Compliance Plan requires that each asset in the portfolio must be valued by an independent external valuer at least once every three years. In practice, assets are generally independently valued more than once every three years primarily as a result of: • A variation between book value and internal tolerance check. Refer to the internal tolerance check section on the previous page. • The asset is undergoing major development or significant capital expenditure on a property. • An opportunity to undertake a valuation in line with a joint owners’ valuation. • Ensuring an appropriate cross-section of assets are externally assessed at each reporting period. SENSITIVITY INFORMATION Significant input Net market rent 10 year specialty market rental growth 10 year average market rental growth Adopted capitalisation rate Adopted terminal yield Adopted discount rate Impact on fair value of an increase in input Impact on fair value of a decrease in input Increase Increase Increase Decrease Decrease Decrease Decrease Decrease Decrease Increase Increase Increase Generally, a change in the assumption made for the adopted capitalisation rate is accompanied by a directionally similar change in the adopted terminal yield. The adopted capitalisation rate forms part of the income capitalisation approach and the adopted terminal yield forms part of the DCF method. When calculating the income capitalisation approach, the net market rent has a strong interrelationship with the adopted capitalisation rate given the methodology involves assessing the total net market income receivable from the property and capitalising this in perpetuity to derive a capital value. In theory, an increase in the net market rent and an increase (softening) in the adopted capitalisation rate could potentially offset the impact to the fair value. The same can be said for a decrease in the net market rent and a decrease (tightening) in the adopted capitalisation rate. A directionally opposite change in the net market rent and the adopted capitalisation rate could potentially magnify the impact to the fair value. When assessing a DCF valuation, the adopted discount rate and adopted terminal yield have a strong interrelationship in deriving a fair value given the discount rate will determine the rate in which the terminal value is discounted to the present value. In theory, an increase (softening) in the adopted discount rate and a decrease (tightening) in the adopted terminal yield could potentially offset the impact to the fair value. The same can be said for a decrease (tightening) in the discount rate and an increase (softening) in the adopted terminal yield. A directionally similar change in the adopted discount rate and the adopted terminal yield could potentially magnify the impact to the fair value. NON-CANCELLABLE OPERATING LEASE RECEIVABLE FROM INVESTMENT PROPERTY TENANTS Annual rent receivable by the Group under current leases from tenants is from property held by the Commercial Property business. Non-cancellable operating lease receivable not recognised in the financial statements at balance date: As at 30 June $M Within one year Later than one year but not later than five years Later than five years Non-cancellable operating lease receivable Stockland Trust 2019 650 1,665 912 3,227 2018 638 1,693 1,034 3,365 2019 652 1,677 912 3,241 2018 639 1,706 1,026 3,371 8. RETIREMENT LIVING KEEPING IT SIMPLE Stockland offers a range of independent living Retirement Living products to best meet the needs of the Group’s customers. Customers have a choice of dwelling type and contractual arrangement, depending on their individual preferences, personal circumstances, and the services and support that they require. Historically, all Retirement Living contracts were under the deferred management fee (DMF) model which allows residents to access the full lifestyle offering of a village today and pay for this when they leave the village. Each state has extensive laws and regulations which are designed to protect resident interests which Stockland complies with. Generally, DMF contracts are affordable as they sell at a lower price than the non-retirement freehold properties in the area. In 2017, Stockland broadened its offering by launching a non-DMF village product called Aspire villages offering freehold title rather than a DMF. DMF contracts Retirement Living residents lend Stockland an amount equivalent to the value of the dwelling in exchange for a lease to reside in the village and to access community facilities, which are Stockland owned and maintained for as long as the resident wants. Stockland records this loan as a resident obligation liability. During the resident’s tenure, Stockland earns DMF revenue which is calculated based on the individual resident contract and depends on the dwelling type, location and specific terms within the agreement. The contract will specify the DMF rate charged each year, and the maximum DMF that will be charged across the life of the contract. The DMF provides customers with the ability to free up equity (usually from the sale of their previous home), giving them extra capital that they can access to fund their retirement lifestyle. The DMF for an individual resident contract covers the right to reside in the dwelling and the resident’s share of up-front capital costs of building the common infrastructure of the village, which typically includes amenities such as a pool, bowling green and community hall, and allows the resident to pay for these at the end of their tenancy, instead of the start. DMF revenue is included in the Retirement Living FFO when Stockland receives the accumulated DMF in cash after a resident leaves and either a new resident enters the dwelling, or when it is withheld under an approved investment proposal for development. The contracts determine how Stockland and the resident will share any net capital gain or loss when the dwelling is re-leased to the next resident. This can range from 0 - 100%; for the majority of existing contracts the capital gain or loss and refurbishment costs are shared equally. The Retirement Living segment result also includes the settled development margin associated with new villages and village expansions or redevelopments. This margin represents the unit price realised on first lease less the cost of development and is recognised in FFO on settlement of a newly developed unit. Unrealised fair value gains or losses from revaluations of investment property and resident obligations are excluded from FFO. Contract choices Stockland continues to improve the Groups’ customer offer with Benefits Plus home care partnerships and our current up-front contract choices, ‘Capital Share’ and ‘Peace of Mind’, which caps the DMF and secures the exit value for incoming residents. The Capital Share contract offers the opportunity to offset the resident’s DMF by paying the resident 50% of any capital gain earned after deducting 50% of any capital expenditures, when the home is resold or after a maximum of eighteen months after the resident leaves the village. DMF is calculated at 5% per annum, capped at 35%. The Peace of Mind contract offers certainty by ensuring the residents know what exit repayment will be when they leave the village. It also guarantees that they will be repaid after a maximum of six months from their departure even if their unit hasn’t yet been sold. DMF is calculated at 5% per annum, capped at 25%. Non-DMF product (Aspire villages) Under these agreements, residents purchase their dwelling outright. There is no DMF associated with these sales as the dwelling is no longer owned or maintained by Stockland. Stockland recognises profit based on property development sales revenue net of associated cost of property development sold. 132 133 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 NET CARRYING VALUE As at 30 June $M Operating villages Villages under development Retirement Living investment properties Existing resident obligations Net carrying value of Retirement Living villages Net carrying value movement during the year Balance at 1 July Expenditure capitalised Cash received on first sales Realised investment properties fair value movement Unrealised investment properties fair value movement Retirement Living resident obligations fair value movement Other movements Balance at 30 June A. Investment properties Stockland 2019 3,623 367 3,990 2018 3,756 364 4,120 (2,585) (2,724) 1,405 1,396 1,396 143 (114) 23 (95) 19 33 1,208 249 (73) 15 44 (73) 26 The DCF methodology uses unobservable inputs and these are further explained below: Item DCF method Discount rate 20 year growth rate Description Under the DCF method, an asset or liability’s fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. The DCF method involves the projection of a series of cash flows the property asset will generate. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of the income stream associated with the real property. The rate of return used to convert a monetary sum, payable or receivable in the future, into present value. It reflects the opportunity cost of capital, that is, the rate of return the capital can earn if put to other uses having similar risk. The rate is determined with regards to market evidence and the external valuations performed. This represents the rate that the unit is expected to increase in value by over 20 years. It is determined on the basis of the historical performance of the property, available sector and industry benchmarks, available CPI forecasts and the external valuations performed. Average length of stay of existing and future residents Assumptions on future resident gender and entry age based upon analysis of historical entrant profiles are used to estimate average length of stay. Current market value Market values are generally reviewed semi-annually by the sales and operational teams in light of external valuation performed and market and approved by the National Sales Manager and CEO Communities. Renovation/Reinstatement cost The cost that is required to maintain the independent living units and serviced apartments to the appropriate condition. 1,405 1,396 Renovation recoupment The percentage of renovation costs that will be recouped from the residents based on contractual terms. Retirement Living investment properties comprise retirement villages (both operating villages and villages under development) held to earn revenue and capital appreciation over the long-term. Retirement villages comprise Independent Living Units, Serviced Apartments, community facilities and integral plant and equipment. DISPOSALS During the year, Stockland disposed of three villages in Victoria for proceeds of $60 million, payable over two instalment in FY19 and FY20. During the prior year, Stockland disposed of one village in Victoria for proceeds of $5 million. FAIR VALUE MEASUREMENT, VALUATION TECHNIQUES AND INPUTS The fair value of Retirement Living investment properties (including villages under development) is the value of the Retirement Living assets and the future cash flows associated with the contracts. Changes in fair value of investment properties are recognised in profit or loss. The fair value is determined by the Directors using a DCF methodology. The valuation of Retirement Living investment properties and resident obligations is a key area of accounting estimation and judgement for the Group. Both the investment properties and resident obligations are considered to be level 3 in the fair value Hierarchy. The following table shows the valuation techniques used in measuring the fair value of Retirement Living investment properties excluding assets held for sale, as well as significant unobservable inputs used. The following significant unobservable inputs are used to measure the fair value of the investment properties: Inputs used to measure fair value 2019 2018 Discount rate1 Average 20 year growth rate Average length of stay of existing and future residents Current market value of unit Renovation/Reinstatement cost Renovation recoupment 12.5 – 14.75% (Average: 13.0%) 12.5 – 14.75% (Average: 13.0%) 3.3% 11 years 3.1% 10.9 years $0.1 – 2.2 million $0.1 – 2.2 million $3 – 75k 0 – 100% $5 – 90k 0 – 100% 1 Discount rate includes a premium to allow for future village-wide capital expenditure. VALUATION PROCESS The Retirement Living finance team are responsible for managing the bi-annual DMF valuation process across Stockland’s Retirement Living portfolio. The aim of the DMF valuation process is to confirm that assets are held at fair value on Stockland’s balance sheet. ESTABLISHED VILLAGES Internal valuations are completed every six months using valuation models with reference to external market data. An independent professionally qualified valuer who holds a recognised relevant professional qualification and has specialised expertise in the investment properties valued provides assurance on the key assumptions used. The most recent independent assessment was obtained at 30 April 2019. Independent investment property valuations are also obtained from time to time. The Directors have considered the changes in market and village specific conditions since the independent assessment and valuations were obtained in their estimate of fair value at reporting date. VILLAGES UNDER CONSTRUCTION Villages under construction are carried at fair value. There are two elements to the value of villages under construction: the value of land and other development expenditure and the value of discounted future DMF revenue. The land and other development expenditure is made up of costs incurred to date plus a development margin. Development margin is recognised on a percentage of completion basis and is based on an internally certified level of completion of the stage. The DMF asset is recognised on a percentage of completion basis. Units are transferred from villages under construction to established villages once they have been leased for the first time. This transfer is at the cost of the unit plus development profit recognised during construction. SENSITIVITY INFORMATION Significant input Discount rate 20 year growth rate Average length of stay of existing and future residents1 Current market value of unit Renovation cost Renovation recoupment Impact on fair value of an increase in input Impact on fair value of a decrease in input Decrease Increase Decrease Increase Decrease Increase Increase Decrease Increase Decrease Increase Decrease 1 This is dependent on the length of stay as the majority of contracts have maximum DMF periods. 134 135 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 B. Resident obligations Resident obligations represent the net amount owed by Stockland to current and former residents. Resident obligations are non-interest bearing and movements are recognised at fair value through profit or loss as the Retirement Living portfolio is measured and assessed by Stockland on a net basis. CURRENT RESIDENT OBLIGATIONS Based on actuarial turnover calculations, approximately 6% (2018: 7%) of residents are estimated to depart their dwelling each year and therefore it is not expected that the full obligation to residents will fall due within one year. In the vast majority of cases, the resident obligations are able to be repaid from receipts from incoming residents. Accounting Standards require that resident obligations are classified as current, unless Stockland has an unconditional contractual right to defer settlement for at least 12 months, because residents have the right to terminate their occupancy contract with immediate effect. NON-CURRENT RESIDENT OBLIGATIONS The non-current obligation relates to certain legacy contracts that give Stockland a right to defer settlement for up to eight years. As at 30 June $M Existing resident obligation Former resident obligation Resident obligation 2019 Current Non-current 2,490 6 2,496 95 6 101 Stockland Total 2,585 12 2,597 2018 Current Non-current 2,567 10 2,577 157 7 164 Total 2,724 17 2,741 FAIR VALUE MEASUREMENT, VALUATION TECHNIQUES AND INPUTS The fair value of the resident obligations is the amount payable on demand to residents and comprises the initial loan amount plus the resident’s share of any net capital gains or losses in accordance with their contracts less DMF earned to date. Changes in fair value of resident obligations are recognised in profit or loss. Inputs used in relation to the resident obligations are identical to those used for Investment Properties. Refer above for a detailed description of the inputs used. VALUATION PROCESS It is impractical to have the resident obligations valued externally, therefore these are valued every six months by the Directors as described above. Key assumptions used in these valuations are externally reviewed and assessed for reasonableness each reporting period. SENSITIVITY INFORMATION As the resident obligations are a financial liability, a quantitative sensitivity analysis has been disclosed. Sensitivity of the resident obligations to changes in the assumptions are shown below: Increase/(decrease) in resident obligations Increase in input Decrease in input 9. RECEIVABLES As at 30 June $M Trade receivables Allowance for expected credit loss Net trade receivables Straight-lining of rental income Other receivables Current receivables Straight-lining of rental income Other receivables Receivables due from related companies Allowance for expected credit loss1 Non-current receivables Stockland Trust 2019 2018 2019 2018 104 (2) 102 7 99 208 67 27 – – 94 44 (1) 43 1 54 98 71 28 – – 99 9 (2) 7 7 27 41 70 – 2 (1) 1 1 20 22 75 – 3,518 (8) 3,580 3,288 – 3,363 1 The Trust has applied the expected credit losses impairment model to its unsecured intergroup loan receivable from Stockland Corporation Limited which is repayable in 2023 following the application of AASB9. While there has been no history of defaults, and the loan is considered to be low credit risk, an impairment provision determined as twelve months expected credit losses has been recorded at balance date. This loan eliminates on consolidation so there is no impact on Stockland. Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less any allowance under the expected credit loss model. 10. PAYABLES As at 30 June $M Trade payables and accruals Land purchases Distributions payable GST payable/(receivable) Current payables Land purchases Non-current payables Stockland Trust Note 2019 2018 4 281 69 336 10 696 147 147 273 157 329 51 810 173 173 2019 120 – 336 (1) 455 – – 2018 134 – 329 (1) 462 – – Significant input Current market value Change in assumption 10% 2019 163 2018 177 2019 (163) 2018 (177) Trade and other payables are initially recognised at fair value less transaction costs and subsequently carried at amortised cost. The carrying values of receivables and payables at balance date represent a reasonable approximation of their fair value. For the majority of existing contracts, the resident shares net capital gains or losses with Stockland upon exit; therefore, current market value is the only input that significantly impacts the fair value of the resident obligation. 136 137 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 11. INTANGIBLE ASSETS DEVELOPMENT PIPELINE Future development cash flows are based on formal budgets approved by management expected to commence in the next five year period and future development pipeline assumptions. The cash flows incorporate projections for development costs, selling price and associated DMF for the Retirement Living Communities in the development pipeline. Future cash flows are discounted at 15.0% (2018: 15.0%). Cash flows beyond the five year period have been determined by applying a growth rate of 3.4% p.a. (2018: 3.5% p.a.). The growth rate applied does not exceed the long-term average rate for the Australian Retirement Living property market. Management believe that due to the extended time it takes to develop a village and the general long-term nature of Retirement Living Communities, where Stockland has the ability to manage assets over that extended period, it is reasonable to use a cash flow period of greater than five years. SOFTWARE Software is stated at cost less accumulated amortisation and impairment losses. Amounts incurred in design and testing of software are capitalised, including employee costs and an appropriate part of directly attributable overhead costs, where the software will generate probable future economic benefits. This is a key area of accounting estimation and judgement for the Group. Costs associated with maintaining software are recognised as an expense as incurred. All software is currently amortised based on the straight-line method and using rates between 10 – 100% (2018: 10 – 33%) from the point at which the asset is ready for use. Amortisation is recognised in profit or loss. The range of amortisation rates has been updated to reflect new enterprise resource planning software, a part of which commenced amortisation during the year. The residual value, the useful life and the amortisation method applied to an asset are reviewed at least annually. 12. NON-CURRENT ASSETS HELD FOR SALE As at 30 June $M Investment properties transferred from Commercial Property Non-current assets held for sale Stockland Trust 2019 2018 2019 2018 171 171 65 65 171 171 22 22 Investment properties held for sale at 30 June 2019 include Stockland Tooronga, Tooronga VIC, 40 Scanlon Drive, Epping VIC, Toll Drive, Altona VIC and Port Adelaide Distribution Centre, Port Adelaide SA. Contracts for the sale of the properties have been exchanged after reporting date. During the current year, Stockland completed the sale of Stockland Highlands, Craigieburn VIC and 40 Cameron Avenue, Belconnen ACT, which were classified as non-current assets held for sale at 30 June 2018. Investment properties are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Investment properties held for sale remain measured at fair value in accordance with the policy presented in note 7. As at 30 June $M Goodwill Software 2019 Under development Stockland 2018 Total Goodwill Software Under development Total Gross carrying amount Opening balance Additions Retirements/disposals1 Transfer Closing balance Accumulated amortisation and impairment Opening balance Retirements/disposals1 Amortisation Impairment Closing balance 117 – – – 117 (41) – – (38) (79) 113 – (79) 19 53 (85) 79 (13) – (19) 90 54 – (23) 121 – – – – – 320 54 (79) (4) 291 (126) 79 (13) (38) (98) 117 – – – 117 97 – – 16 113 (41) (77) – – – – (8) – (41) (85) 60 46 – (16) 90 – – – – – 274 46 – – 320 (118) – (8) – (126) Intangible assets 38 34 121 193 76 28 90 194 1 The net impact of these retirements and disposals on the intangible assets carrying value is $nil as these assets were fully depreciated. GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of Stockland’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill that has an indefinite useful life is not subject to amortisation and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The determination of the recoverability of goodwill is an area of accounting estimation and judgement for the Group. 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 each CGU or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments. Goodwill arose on the acquisition of the Retirement Living division of Australian Retirement Communities on 28 February 2007 and the acquisition of Aevum Limited on 31 October 2010. IMPAIRMENT TEST An impairment of goodwill of $38 million was recognised in the current year (2018: $nil) primarily driven by a reduction in future development pipeline. The goodwill impairment test is based upon the value in use method using cash flow projections for Retirement Living unrecognised development profits. Unrecognised development profits comprises of cash flows from both the development pipeline and deferred repayment contracts which are considered to benefit from the acquisitions. At year-end, the recoverable amount of the CGU was $406 million which is equivalent to the book value of the Retirement Living development business. Following the impairment recognised in the Retirement Living development business CGU, the recoverable amount is equal to the carrying amount. Therefore, any adverse movement in a key assumption would lead to further impairment. DEFERRED REPAYMENT (DR) CONTRACTS The Australian Retirement Communities portfolio acquired in 2007 included a number of Deferred Revenue (“DR”) contracts. These DR contracts were entered into prior to the Stockland acquisition at a wholesale price on development, and therefore were expected to result in higher conversion profit upon next settlement when they are priced at retail value and converted to Stockland target contracts. The cash flows are discounted over their forecast maturity at 13.0% (2018: 13.0%) and cash flows beyond the five year period have been determined by applying a growth rate of 3.1% p.a. (2018: 3.1% p.a.). The growth rate applied does not exceed the long-term average rate for the Australian retirement living property market. 138 139 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Capital structure and financing costs IN THIS SECTION This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet liquidity and access to capital markets. The Board determines the appropriate capital structure of the Group; specifically, how much is raised from securityholders (equity) and how much is borrowed from financial institutions and capital markets (debt), in order to finance the Group’s activities both now and in the future. The Board considers the Group’s capital structure and its dividend and distribution policy at least twice a year ahead of announcing results, in the context of its ability to continue as a going concern, to execute the strategy and to deliver its business plan. During the year Stockland’s credit rating remained unchanged at A-/stable and A3/stable by S&P and Moody’s respectively. The Board continued to monitor the Group’s capital structure through its gearing ratio and maintains a capital structure to minimise the cost of capital. The Group has a stated target gearing ratio range of 20% to 30%. In addition, the Group is exposed to changes in interest rates on its net borrowings and to changes in foreign exchange rates on its foreign currency transactions and net assets. In accordance with risk management policies, the Group uses derivatives to appropriately hedge these underlying exposures. 13. NET FINANCING COSTS KEEPING IT SIMPLE This note details the interest income generated on the Group’s cash and other financial assets and the interest expense incurred on borrowings and other financial assets and liabilities. The presentation of the net financing costs in this note reflects income and expenses according to the classification of the financial instruments. Fair value movements reflect the change in fair value of the Group’s derivative instruments between the later of inception or 1 July 2018 and 30 June 2019. The fair value at year end is not necessarily the same as the settlement value at maturity. Interest income is recognised in profit or loss as it accrues using the effective interest method. Finance expense include interest payable on short-term and long-term borrowings calculated using the effective interest method and payments on derivatives. Borrowing costs are expensed as incurred except to the extent that they are directly attributable to the acquisition, construction or production of a qualifying asset such as investment properties or inventories. Qualifying assets are assets that necessarily take a substantial period of time to reach the stage of their intended use or sale. In these circumstances, borrowing costs are capitalised to the cost of the assets whilst in active development until the assets are ready for their intended use or sale. Total interest capitalised must not exceed the net interest expense in any period. Project carrying values, including all capitalised interest attributable to projects, must continue to be recoverable based on the latest project feasibilities. In the event that development is suspended for an extended period of time or the decision is taken to dispose of the asset, the capitalisation of borrowing costs is also suspended. The rate at which interest has been capitalised to qualifying assets is disclosed in note 6. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate applied to the expenditures on the asset excluding specific borrowings. The accounting policy and fair value of derivatives are discussed in note 16 and 17. 14. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash balances and at call deposits. Bank overdrafts that are repayable on demand and form an integral part of Stockland’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flow. As at 30 June 2019, Stockland does not have any bank overdrafts. Included in the cash and cash equivalents balance of $140 million is $55 million (2018: $92 million) in cash that is relating to joint ventures and/or held to satisfy real estate and financial services licensing requirements, and is not immediately available for use by the Group. 15. BORROWINGS KEEPING IT SIMPLE Stockland Trust The interest expense on these instruments are shown in note 13. The Trust borrows money from financial institutions and debt investors in the form of bonds, bank debt and other financial instruments. The Trust’s bonds generally have fixed interest rates and are for a fixed term. 2019 2018 – 3 3 2019 282 2 284 2018 266 2 268 Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs and subsequently are stated at amortised cost. Any difference between amortised cost and redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. However, where an effective fair value hedge is in place, borrowings are stated at the carrying amount adjusted for changes of fair value of the hedged risk. The changes are recognised in profit and loss. (202) (192) (202) The table below shows the fair value of each of these instruments measured at level 2 in the fair value hierarchy. Fair value reflects the principal amount and remaining duration of these notes based on current market interest rates and conditions at balance date. Net financing costs can be analysed as follows: Year ended 30 June $M Interest income from related parties Interest income from other parties Finance income Interest expense relating to borrowings Interest paid or payable on other financial liabilities at amortised cost Less: interest capitalised to inventories Less: interest capitalised to investment properties Finance expense Gain/(loss) on net change in fair value of derivatives Gain/(loss) on net change in fair value of borrowings Net gain/(loss) on fair value hedges Gain/(loss) on foreign exchange movements Gain/(loss) on fair value movements Net gain/(loss) on debt and derivatives Net gain/(loss) on financial instruments – 4 4 (192) (40) 136 9 (87) 233 (240) (7) (12) (121) (133) (140) (34) 142 17 (77) (24) 12 (12) (19) 24 5 (7) – – 3 – – 10 (189) (192) 233 (239) (6) (13) (121) (134) (140) (24) 12 (12) (19) 24 5 (7) The interest expense relating to borrowings includes $62 million (2018: $67 million) related to interest on financial liabilities carried at amortised cost, and not designated in a fair value hedge relationship. As at 30 June $M 2019 Offshore medium term notes Domestic medium term notes Bank debt facilities Borrowings 2018 Offshore medium term notes Domestic medium term notes Bank debt facilities Borrowings Stockland and Trust Carrying value Note Current Non-current Total Fair value A B C A B C 78 150 115 343 240 – – 240 3,694 607 60 4,361 3,141 557 – 3,698 3,772 757 175 4,704 3,381 557 – 3,938 4,215 801 175 5,191 3,728 595 – 4,323 140 141 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 The difference of $487 million (2018: $385 million) between the carrying amount and fair value of the foreign and domestic medium term notes is due to notes being carried at amortised cost under AASB 9 while the fair value represents the amount required to replicate at balance date the principal and duration of these notes based on current market interest rates and conditions. A. Offshore medium term notes US PRIVATE PLACEMENT The Trust has issued fixed coupon notes in the US private placement market. Generally, notes are issued in United States dollars (USD) and converted back to Australian dollars (AUD or $) principal and AUD floating coupons through CCIRS. During the current year, the Trust repaid USD 176 million ($269 million) of notes in October 2018 and issued USD 250 million ($351 million) in April 2019. The fair value of the US private placements as at 30 June 2019 is $2,816 million (2018: $2,412 million). Details of the offshore medium term notes on issue in the US private placement market are set out below: Face value1 Carrying amount Stockland and Trust $M Maturity date October 2018 July 2019 July 2020 September 2021 June 2022 August 2022 August 2024 August 2025 December 2025 August 2026 June 2027 August 2027 January 2028 August 2028 February 2029 April 2029 January 2030 August 2030 April 2031 August 2031 January 2033 May 2034 Total Fixed rate coupon Floating CCIRS2 2019 6.01% 0.73% - 0.65% 5.19% 0.85% - 0.83% 5.24% 0.87% - 0.86% 4.32% 2.44% - 2.48% 6.15% 1.00% 3.99 / 6.80% 2.93% - 3.08% 4.14% 3.75% 5.09% 3.09% 6.28% 3.85% 3.63% 2.99% 1.62% – – 0.87% 1.63% 1.65% 3.19 / 4.35% 2.23% / - 4.67% 1.40% 3.81% 1.75% - 1.78% 3.73 / 4.42% 1.75% - 1.78% 4.00% 1.69% 3.91% 1.84% - 1.86% 3.34% 2.27% 3.88 / 4.66% 1.90% - 1.91% 4.01% 1.91% – 71 90 176 28 105 50 157 100 200 20 131 47 139 141 162 106 72 162 59 133 28 2018 269 71 90 176 28 105 50 157 100 200 20 131 47 139 141 0 106 72 0 59 133 0 2,177 2,094 2019 – 78 100 267 41 101 50 181 100 217 32 154 55 143 204 170 117 87 172 61 139 31 2,500 (11) 2,489 2018 240 75 96 246 39 98 46 162 100 188 31 135 48 131 180 0 108 75 0 52 134 0 2,184 (6) 2,178 Less attributable transaction costs US private placement 1 Face value of the notes in AUD after the effect of the CCIRS. Thus also representing 100% of the notional amount of the CCIRS. 2 Variable interest rate margin above the 90 day bank bill rate. The 90 day bank bill rate as at 30 June 2019 was 1.2046% (2018: 2.1105%). The majority of the CCIRS is in a designated hedge relationship. ASIAN AND EUROPEAN PRIVATE PLACEMENT The Trust has issued medium term notes in the Asian and European capital markets with face values of Hong Kong dollars (HKD) 470 million ($62 million), HKD 400 million ($55 million), HKD 540 million ($100 million), HKD 300 million ($51 million), Euros (EUR) 300 million ($433 million) and EUR 300 million ($478 million). All notes are issued at a fixed coupon payable in either HKD or EUR and converted back to AUD floating coupons through CCIRS. The fair value of all the notes on issue as at 30 June 2019 is $1,399 million (2018: $1,316 million). Details of the offshore medium term notes on issue in the Asian and European private placement market are set out below: $M CCIRS Face value1 Carrying amount Stockland and Trust Maturity date Fixed rate coupon Type 1.50% 3.37% Floating Floating 4.00% Floating Rate2 1.48% 1.89% 1.62% 3.38% 1.63% 3.70% Fixed 4.90% Floating Floating 1.70% 1.53% November 2021 May 2025 October 2025 January 2026 April 2026 May 2028 Total Less attributable transaction costs Asian and European private placement 2019 433 62 55 100 478 51 2018 433 62 55 100 478 51 1,179 1,179 2019 446 86 80 99 519 60 1,290 (7) 1,283 2018 446 77 71 84 480 52 1,210 (7) 1,203 Face value of the notes in Australian dollars after the effect of the CCIRS. Thus also representing 100% of the notional amount of the CCIRS. 1 2 Variable interest rate margin above the 90 day bank bill rate. The 90 day bank bill rate as at 30 June 2019 was 1.2046% (2018: 2.1105%). All of the CCIRS are in a designated hedge relationship. B. Domestic medium term notes Domestic Medium term notes have been issued at either face value or at a discount to face value and are carried at amortised cost. The discount is amortised to finance costs over the term of the notes. The medium term notes are issued on either fixed or floating interest rate terms. During the current year, the Trust issued medium term notes with a face value of $200 million. The fair value of all the notes on issue as at 30 June 2019 is $801 million (2018: $595 million). Details of unsecured domestic medium term notes on issue are set out below: $M Maturity date September 2019 November 2020 November 2022 March 2024 Total Less attributable transaction costs Domestic medium term notes C. Bank debt facilities Stockland and Trust Fixed rate coupon 2019 2018 5.50% 8.25% 4.50% 3.30% 150 160 250 200 760 (3) 757 150 160 250 0 560 (3) 557 The bank debt facilities are unsecured and held at amortised cost. Details of maturity dates, excluding bank guarantee facilities are set out below: $M Maturity date December 2018 July 2019 August 2019 December 2019 July 2021 January 2021 January 2022 February 2022 November 2022 Bank facilities Stockland and Trust 2019 2018 Utilised Limit Utilised – – 15 100 60 – – – – 175 – – 120 200 100 – 250 150 100 920 – – – – – – – – – – Limit 100 100 120 100 – 250 – 150 100 920 142 143 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 16. OTHER FINANCIAL ASSETS AND LIABILITIES KEEPING IT SIMPLE Investments in other financial assets are managed in accordance with the Group’s documented risk policy. Based on the nature of the asset and its purpose, movements in the fair value of other financial assets are recognised either through profit or loss or other comprehensive income. Stockland Trust Other financial assets Other financial liabilities Other financial assets Other financial liabilities 2019 2018 2019 2019 2018 2019 2018 (29) – (4) (33) (25) (38) – – – (2) (2) – (14) – – 8 1 9 355 81 43 28 18 – 12 – 12 156 66 25 17 18 – 12 – 12 156 66 25 17 8 – 8 1 9 355 81 43 28 8 515 2018 (29) – (4) (33) (25) (38) – – – (2) (2) – (14) – (204) (100) – – (204) (100) – – As at 30 June $M Fair value hedges CCIRS – through profit or loss Interest rate derivatives – through profit or loss Current Fair value hedges Cash flow hedges CCIRS – through profit or loss Interest rate derivatives – through profit or loss Other Non-current DERIVATIVE FINANCIAL INSTRUMENTS KEEPING IT SIMPLE A derivative is a type of financial instrument typically used to manage the underlying risk. A derivative’s value changes over time in response to underlying variables such as exchange rates or interest rates and is entered into for a fixed period. A hedge is where a derivative is used to manage the underlying exposures. The Group uses derivatives to manage exposure to foreign exchange and interest rate risk. Stockland holds a number of derivative instruments including interest rate swaps, foreign exchange contracts and CCIRS. Derivative financial instruments are recognised initially at fair value and re-measured at each balance date. The valuation of derivatives is an area of accounting estimation and judgement for the Group. Third party valuations are used to determine the fair value of Stockland’s derivatives. The valuation techniques use inputs such as interest rate yield curves and currency prices/yields, volatilities of underlying instruments and correlations between inputs. The fair value of interest rate swaps is the estimated amount that Stockland would receive or pay to transfer or realise the swap at the reporting date, taking into account current interest rates and the current creditworthiness of each counterparties. The fair value of forward foreign exchange contracts is determined by using the difference between the contract exchange rate and the quoted forward exchange rate at the reporting date. The gain or loss on re-measurement to fair value is recognised in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. Stockland enters into ISDA Master Agreements with its derivative counterparties. Under the terms of these arrangements, where certain credit events occur, the net position owing/receivable to a single counterparty in relation to all outstanding derivatives with that counterparty, will be taken as owing/receivable and all the relevant arrangements terminated. As Stockland does not presently have a legally enforceable right of set- off, these amounts have not been offset in the balance sheet. In the event a credit event occurred, the ISDA Master Agreement would have the effect of netting, allowing a reduction to derivative assets and derivative liabilities of the same amount of $195 million (2018: $136 million). DERIVATIVES THAT QUALIFY FOR HEDGE ACCOUNTING Stockland uses a limited number of derivative financial instruments to hedge its exposure to fluctuations in interest and foreign exchange rates. At the inception of the transaction, Stockland designates and documents these derivative instruments into a hedging relationship with the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Stockland documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair value or cash flows of hedged items. A fair value hedge is a hedge of the exposure to changes in fair value of an asset or liability that is attributable to a particular risk. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Hedge accounting is discontinued when the hedging instrument matures or is sold, terminated or exercised, or until such time where the hedging relationship ceases to meet the qualifying criteria. Any adjustment between the carrying amount and the face value of a hedged financial instrument is amortised to profit or loss using the effective interest rate method. Amortisation begins when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. 525 282 (218) (163) 272 (218) (163) FAIR VALUE HEDGE Stockland manages its exposure to financial market risks as part of its operations through the use of derivatives. CASH FLOW HEDGE Stockland’s treasury policy requires: • all contractual or committed foreign exchanges payments or receipts to be fully hedged back to Australian dollar unless the exposure is immaterial in nature.; and • interest rate risk exposures to be managed to operate within a fixed hedge ratio of: • 45 to 55% on debt due to mature within 5 years; and • 30 to 40% on debt maturing in more than five years. Deviation from these benchmarks at any point in time requires approval from the CFO and/or Audit Committee. Stockland assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method. In these hedge relationships, the main sources of ineffectiveness are: • the effect of the counterparty and Stockland’s own credit risk on the fair value of the swaps, which is not reflected in the fair value of the hedged item; and • changes in interest rates will impact the fair value of the Australian dollar margin and implied foreign currency margin respectively. In order to qualify for hedge accounting, prospective hedge effectiveness testing must meet all of the following criteria: • an economic relationship exists between the hedged item and hedging instrument; • the effect of credit risk does not dominate the value changes resulting from the economic relationship; and • the hedge ratio is the same as that resulting from actual amounts of hedged items and hedging instruments for risk management. A cash flow hedge is a hedge of the exposure to variability in cash flows attributable to a particular risk associated with an asset, liability or highly probable forecast transaction that could affect profit or loss. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within finance income or expense. Amounts in the cash flow hedge reserve are recognised in profit or loss in the periods when the hedged item is recognised in profit or loss. Hedge accounting is discontinued when the hedging instrument matures or is sold, terminated or exercised, no longer qualifies for hedge accounting, or when Stockland revokes designation. Any cumulative gain or loss recognised in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is recognised immediately in profit or loss. Additionally, there are a number of derivatives that are not designated as fair value and/or cash flow hedges. These are used to hedge economic exposures and the gains or losses on re-measurement to fair value of these instruments are recognised immediately in profit or loss. 144 145 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Borrowings Derivatives Stockland and Trust Carrying Amount Market to market $M US Dollar 2019 2,500 2018 2,184 Effective 2,249 1,943 Ineffective Euro HK Dollar 251 965 325 241 926 284 Move- ments (Repaid) Drawn 316 306 10 39 41 82 82 – – – Gain or loss on FV of Debt (234) (224) (10) (39) (41) AUD Bank Debt AUD MTNs AUD IRS 175 760 – – 560 – 175 200 – 175 200 – – – – Borrowings costs (21) (16) (5) Termi- nated Paid Move- ments Cash flow hedge reserve impact Gain or Loss on FV of derivatives 2019 2018 337 286 51 92 44 113 76 37 39 15 224 210 14 53 29 – – – – – – – – – – – – – – (10) (10) – 15 (10) 234 220 14 38 39 (5) 311 – – – – – Net gain or loss recognised in profit or loss – (4) 4 (1) (2) (3) – – (177) (87) (90) (47) (137) (137) Foreign exposure 3,790 3,394 396 82 (314) 473 167 306 Total 4,704 3,938 766 457 (314) 296 80 216 (47) (5) 174 (140) 17. FAIR VALUE HIERARCHY KEEPING IT SIMPLE The financial instruments included on the balance sheet are measured at either fair value or amortised cost. The measurement of fair value may in some cases be subjective and may depend on the inputs used in the calculations. The Group generally uses external valuations based on market inputs or market values (e.g. external share prices). The different valuation methods are called hierarchies and are described below: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). DETERMINATION OF FAIR VALUE The fair value of derivative financial instruments, including domestic and offshore medium term notes, interest rate derivatives and CCIRS, is determined in accordance with generally accepted pricing models by discounting the expected future cash flows using assumptions supported by observable market rates. Whilst certain derivatives are not quoted in an active market, Stockland has determined the fair value of these derivatives using quoted market inputs (e.g. interest rates, volatility, and exchange rates) adjusted for specific features of the instruments and debit or credit value adjustments based on the current credit worthiness of Stockland or the derivative counterparty. The fair value of forward exchange contracts is the quoted market price of the derivative at balance date, being the present value of the quoted forward price. The table below sets out the financial instruments included on the balance sheet at fair value. Quantitative sensitivities required under AASB 13 Fair Value Measurement in relation to the Retirement Living resident obligations have been disclosed in note 8. 146 As at 30 June $M Derivative assets Securities in unlisted entities Other investments Financial assets carried at fair value Derivative liabilities Retirement Living resident obligations Financial liabilities carried at fair value Stockland 2019 2018 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total – – 10 10 – – – 516 – – 516 (220) – 8 – 8 – 516 8 10 534 (220) – (2,597) (2,597) (220) (2,597) (2,817) – – 10 10 – – – 10 276 – – 276 (196) – 8 – 8 – 276 8 10 294 (196) – (2,741) (2,741) (196) (2,741) (2,937) 80 (2,733) (2,643) Net position 10 296 (2,589) (2,283) As at 30 June $M Derivative assets Securities in unlisted entities Financial assets carried at fair value Derivative liabilities Financial liabilities carried at fair value Net position Trust 2019 2018 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total – – – – – – 516 – 516 (220) (220) 296 – 8 8 – – 8 516 8 524 (220) (220) 304 – – – – – – 276 – 276 (196) (196) 80 – 8 8 – – 8 276 8 284 (196) (196) 88 Derivative financial assets and liabilities are not offset in the balance sheet as under agreements held with derivative counterparties, the Group does not have a legally enforceable right to set off the position payable/receivable to a single counterparty. The following table shows a reconciliation from the opening balances to the closing balances for fair value measurements in Level 3 of the fair value hierarchy. There were no transfers between levels during the year. Stockland 2019 2018 $M entities Derivatives Securities in unlisted Retirement Living resident obligations Securities in unlisted Total entities Derivatives Balance at 1 July Gain/losses recognised in • Profit or loss1 • Other comprehensive income Cash receipts from incoming residents on turnover Cash payments to outgoing residents on turnover, net of DMF Return of capital Balance at 30 June 8 – – – – – 8 – – – – – – – (2,741) (2,733) 267 – 267 – (295) (295) 172 172 32 (1) 2 – – – – (2,597) (2,589) (25) 8 – – – – – – – Retirement Living resident obligations Total (2,629) (2,597) 10 – 9 2 (272) (272) 150 150 – (25) (2,741) (2,733) 1 Include impact of derecognition of obligations related to village disposals of $187m (FY18 $21m). Trust 2019 2018 $M Balance at 1 July Loss recognised in Profit or loss Balance at 30 June Securities in unlisted entities Derivatives Retirement Living resident obligations Securities in unlisted Total entities Derivatives Retirement Living resident obligations 8 – 8 – – – – – – 8 – 8 9 (1) 8 – – – – – – Total 9 (1) 8 147 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 18. FINANCIAL RISK FACTORS KEEPING IT SIMPLE The Group’s activities expose it to a variety of financial risks: market risks (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on financial performance. The Group uses derivatives within its policies described below as hedges to manage certain risk exposures. Financial risk and capital management is carried out by a central treasury department. The Board reviews and approves written principles of overall risk management, as well as written policies covering specific areas such as managing capital, mitigating interest rates, liquidity, foreign exchange and credit risks, use of derivative and investing excess liquidity. The Audit Committee assists the Board in monitoring the implementation of these treasury policies. The sensitivity analysis included in this note shows the impact that a shift in the financial risks would have on the financial statements at year-end, but is not a forecast or prediction. In addition, it does not include any management action that might take place to mitigate these risks, were they to occur. A. Market risk Market risk is the risk that changes in market prices, such as exchange rates, interest rates and equity prices will affect Stockland’s financial performance or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising returns. CURRENCY RISK Currency risk arises when anticipated transactions or recognised assets and liabilities are denominated in a currency that is not Stockland’s functional currency, being Australian dollars (AUD). Stockland has currency exposures to the Euro (EUR), Hong Kong dollar (HKD) and US dollar (USD). The Group manages its currency risk by using CCIRS and forward exchange contracts. The Group’s offshore medium term notes create both an interest rate and a currency exchange risk exposure. The Group’s policy is to minimise its exposure to both interest rate and exchange rate movements. Accordingly, the Group has entered into a series of CCIRS which cover 100% of the US, European and Asian private placement principals outstanding and are timed to expire when each note matures. These CCIRS also swap the obligation to pay fixed interest to floating interest. When these swaps held are no longer effective in hedging the interest rate and currency risk exposure, management will reassess the value in continuing to hold the swap. These CCIRS have been designated as fair value and cash flow hedges and are accounted for in line with the accounting principles highlighted in note 16. The following table provides a summary of the face values of the Group’s currency risk exposures together with the derivatives which have been entered into to manage these exposures. As at 30 June Currency $M Borrowings CCIRS Exposure 1 All amounts are denominated in their natural currency. Stockland and Trust 2019 EUR1 HKD1 USD1 (600) (1,710) (1,468) 600 – 1,710 1,468 – – EUR1 (600) 600 – 2018 HKD1 (1,710) 1,710 – USD1 (1,394) 1,394 – SENSITIVITY ANALYSIS – CURRENCY RISK The following sensitivity analysis shows the impact on the profit or loss and equity if there was an increase/decrease in AUD exchange rates of 10% at balance date with all other variables held constant. Stockland and Trust 2019 2018 As at 30 June Profit or loss Equity Profit or loss Equity $M EUR HKD USD Impact Increase Decrease Increase Decrease Increase Decrease Increase Decrease – – (1) (1) – – 2 2 (55) (11) (24) (90) 55 14 30 99 – – (1) (1) – – 2 2 (54) (9) (23) (86) 54 11 28 93 B. Interest rate risk Interest rate risk is the risk that the fair value or cash flows of financial instruments will fluctuate due to changes in interest rates. The Trust’s interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Trust to cash flow interest rate risk. Borrowings issued at fixed rates expose the Trust to fair value interest rate risk. The Group’s treasury policy allows it to enter into a variety of approved derivative instruments to manage the risk profile of the total debt portfolio to achieve an appropriate mix of fixed and floating interest rate exposures. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. The Trust manages its fair value interest rate risk through CCIRS and fixed-to-floating interest rate swaps. These derivatives have been recorded on the balance sheet at their fair value in accordance with AASB 9. These derivatives have not been designated as hedges for accounting purposes, nevertheless management believe the hedges are effective economically. As a result movements in the fair value of these instruments are recognised in profit or loss. The table below provides a summary of the Group’s interest rate risk exposure on interest-bearing loans and borrowings after the effect of the interest rate derivatives. $M Fixed rate interest-bearing loans and borrowings1 Floating rate interest-bearing loans and borrowings1 Interest-bearing loans and borrowings 1 Notional principal amounts. SENSITIVITY ANALYSIS – INTEREST RATE RISK Stockland and Trust Net exposure (after the effect of derivatives) 2019 3,837 453 4,290 2018 3,655 177 3,832 The following sensitivity analysis shows the impact on profit or loss and equity if market interest rates at balance date had been 100 basis points higher/lower (2018: 100 basis points) with all other variables held constant. Stockland Trust 2019 2018 2019 2018 $M Increase Decrease Increase Decrease Increase Decrease Increase Decrease Impact on interest income/(expense) Impact on net gain/(loss) on derivatives – through profit or loss 1 107 (1) (113) 3 102 (3) (106) 36 107 (36) (113) Impact on profit or loss 108 (114) 105 (109) 143 (149) 35 102 137 (35) (106) (141) Impact on equity 15 (16) 30 (31) 15 (16) 30 (31) 148 149 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 C. Equity price risk E. Liquidity risk Equity price risk is the risk that the fair value of investments in listed/unlisted entities fluctuate due to changes in the underlying security price. The Group’s equity price risk arises from investments in listed securities and units in unlisted funds. These investments are classified as financial assets carried at fair value, with any resultant gain or loss recognised in profit or loss or other comprehensive income. Material investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by the Board. SENSITIVITY ANALYSIS – EQUITY PRICE RISK Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in liquidity and funding sources by keeping sufficient cash and cash equivalents and/or undrawn committed credit lines available whilst maintaining a low cost of holding these facilities. Management prepares and monitors rolling forecasts of liquidity requirements on the basis of expected cash flow. The Group manages liquidity risk through monitoring the maturity profile of its debt portfolio. The current weighted average debt maturity is 5.8 years (2018: 6.2 years). The following sensitivity analysis shows the impact on profit or loss and equity if the market price of the underlying equity securities/units at balance date had been 10% higher/lower with all other variables held constant. KEEPING IT SIMPLE Stockland Trust As at 30 June 2019 2018 2019 2018 $M Increase Decrease Increase Decrease Increase Decrease Increase Decrease Impact on profit or loss Impact on equity 2 – (2) – 2 – (2) – – – – – – – – – D. Credit risk Credit risk is the risk that a customer or counterparty to a financial instrument fails to meet its contractual obligations resulting in a financial loss to the Group. The Group has no significant concentrations of credit risk to any single counterparty and has policies to review the aggregate exposure of tenancies across its portfolio. The Group also has policies to ensure that sales of properties with deferred payment terms and development services are made to customers with an appropriate credit history. Derivative counterparties and cash deposits are currently limited to financial institutions approved by the Audit Committee. There are also policies that limit the amount of credit risk exposure to any one of the approved financial institutions based on their credit rating and country of origin. The maximum exposure to credit risk at the end of the reporting period is the gross carrying amount of each class of financial assets mentioned in this Report. As at 30 June 2019, these financial institutions had an Investment Grade rating (greater than BBB-) provided by S&P. Bank guarantees and mortgages over land are held as security over certain receivables balances. As at 30 June 2019 and 30 June 2018, there were no significant financial assets that were past due. Financial assets are subject to the expected credit loss model as per AASB 9. The table below analyses the Group’s financial liabilities including derivatives into relevant maturity groupings based on the period remaining until the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), and therefore may not reconcile with the amounts disclosed on the balance sheet. As derivative assets have been excluded from these tables, refer to note 17 for the fair value of the derivative assets to provide a meaningful analysis of Stockland and Trust total derivatives. $M 2019 Non-derivative Payables (excl. GST) Dividends and distributions payable Borrowings Retirement Living resident obligations Derivative Interest rate derivatives CCIRS • Inflows • Outflows Stockland Carrying amount Contractual cash flows 1 year or less 1 – 2 years 2 – 5 years Over 5 years (497) (336) (4,704) (2,597) (205) (15) (522) (336) (5,711) (2,597) (199) 389 (396) (350) (336) (514) (34) – (53) – (85) – (409) (1,763) (3,025) (2,496) – (1) (100) (41) 10 (14) (46) (86) (26) 10 (13) 30 (41) 339 (328) Financial liabilities (8,354) (9,372) (3,741) (492) (1,914) (3,225) $M 2018 Non-derivative Payables (excl. GST) Dividends and distributions payable Borrowings Retirement Living resident obligations Derivative Interest rate derivatives CCIRS • Inflows • Outflows Stockland Carrying amount Contractual cash flows 1 year or less 1 – 2 years 2 – 5 years Over 5 years (603) (329) (3,938) (2,741) (104) (92) (647) (329) (5,020) (2,742) (435) (329) (396) (2,577) (50) – (366) (4) (110) – (1,703) (1) (52) – (2,555) (160) (116) (40) (30) (34) (12) 1,815 (2,011) 279 (322) 34 (50) (466) 103 (159) (1,904) 1,399 (1,480) (2,860) Financial liabilities (7,807) (9,050) (3,820) 150 151 Retirement Living resident obligations are classified as current under Accounting Standards, however, it is not expected to result in actual net cash outflows within the next 12 months. In the vast majority of cases, settlement of Retirement Living resident obligations are able to be repaid from receipts from incoming residents. As at 30 June 2019, $2,585 million (2018: $2,724 million) existing resident obligations do not represent an anticipated net cash outflow as they are expected to be covered by receipts from incoming residents. Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Financial liabilities (5,380) $M 2019 Non-derivative Payables (excl. GST) Dividends and distributions payable Borrowings Derivative Interest rate derivatives CCIRS • Inflows • Outflows $M 2018 Non-derivative Payables (excl. GST) Dividends and distributions payable Borrowings Derivative Interest rate derivatives CCIRS Inflows Outflows Financial liabilities (4,597) Carrying amount Contractual cash flows 1 year or less 1 – 2 years 2 – 5 years Over 5 years Trust 19. ISSUED CAPITAL KEEPING IT SIMPLE (120) (336) (4,704) (205) (15) (120) (336) (5,711) (199) – 389 (396) (6,373) (120) (336) (514) (41) 10 (14) – – – – – – (409) (1,763) (3,025) (46) (86) (26) 10 (13) 30 (41) 339 (328) (1,015) (458) (1,860) (3,040) This note explains material movements recorded in issued capital that are not explained elsewhere in the financial statements. The movements in equity of the Group and the balances are presented in the consolidated statement of changes in equity. Issued capital represents the amount of consideration received for securities issued by the Group. Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit. For so long as Stockland remains jointly quoted, the number of shares in Stockland Corporation Limited and the number of units in the Stockland Trust shall be equal and the securityholders and unitholders shall be identical. Unitholders of Stockland Trust are only entitled to distributions and voting rights upon stapling. Holders of stapled securities are entitled to receive dividends and distributions as declared from time to time and are entitled to one vote per stapled security at securityholder meetings. The liability of a member is limited to the amount, if any, remaining unpaid in relation to a member’s subscription for securities. A member is entitled to receive a distribution following termination of the stapling arrangement (for whatever reason). The net proceeds of realisation must be distributed to members, after making an allowance for payment of all liabilities (actual and anticipated) and meeting any actual or anticipated expenses of termination. Trust The following table provides details of securities issued by the Group: Carrying amount Contractual cash flows 1 year or less 1 – 2 years 2 – 5 years Over 5 years (134) (329) (134) (329) (3,938) (5,020) (134) (329) (396) – – – – – – (366) (1,703) (2,555) (104) (92) (116) (40) (30) (34) (12) Stockland and Trust Number of securities Stockland $M Trust $M As at 30 June 2019 2018 2019 2018 2019 2018 Ordinary securities on issue Issued and fully paid 2,384,351,503 2,434,469,276 8,692 8,884 7,393 7,571 Other equity securities Treasury securities Issued Capital (6,691,865) (7,786,666) 2,377,659,638 2,426,682,610 (35) 8,657 (34) 8,850 (34) 7,359 (33) 7,538 1,815 (2,011) (5,795) 279 (322) (942) 34 (50) (412) 103 (159) (1,793) 1,399 (1,480) (2,648) A. Ordinary securities The following table provides details of movements in securities issued: As at 30 June Opening balance Stockland and Trust Number of securities 2019 2018 2,434,469,276 2,418,400,142 Securities buy back (50,117,773) – Securities issued under the DRP – 16,069,134 Issued Capital 2,384,351,503 2,434,469,276 Stockland $M 2019 8,884 (192) – 8,692 2018 8,817 – 67 8,884 Trust $M 2019 7,571 (178) – 7,393 2018 7,507 – 64 7,571 SECURITIES BUY-BACK On 6 September 2018, Stockland announced the intention to initiate an on-market buy-back for up to $350 million of Stockland securities on issue as part of its active approach to capital management, over up to 24 months. A total of 50,117,773 stapled securities have been bought back on market and cancelled since the commencement of the buy-back on 24 September 2018. 152 153 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 B. Other equity securities TREASURY SECURITIES Treasury securities are securities in Stockland that are held by the Stockland Employee Securities Plan Trust. Securities are held until the end of the vesting period affixed to the securities. As the securities are held on behalf of eligible employees, the employees are entitled to the dividends and distributions. MOVEMENT OF OTHER EQUITY SECURITIES Stockland and Trust Stockland Number of securities $M Opening balance Securities acquired1 2019 2018 7,786,666 6,002,501 3,605,889 4,674,128 Securities transferred to employees on vesting (4,700,690) (2,889,963) Issued Capital 6,691,865 7,786,666 2019 (34) (15) 14 (35) 2018 (27) (20) 13 (34) Trust $M 2019 (33) (15) 14 (34) 2018 (27) (19) 13 (33) 1 Average price: $4.20 per security (2018: $4.37). C. Security based payments KEEPING IT SIMPLE Stockland operates three Security Plans at its discretion for eligible employees which are described below: Long term incentives (LTI) Under the LTI, employees have the right to acquire Stockland securities at nil consideration when certain performance conditions are met. Each grant will comprise two equal tranches, each of which vest based on separate performance hurdles (being underlying EPS growth and/or relative TSR) and has a three year vesting period. Eligibility is by invitation of the Board and is reviewed annually. Deferred short term incentives (DSTI) For Executives and Senior Management there is a compulsory deferral of at least one third of STI incentives into Stockland securities to further align remuneration outcomes with securityholders. Half of the awarded DSTI securities will vest 12 months after award with the remaining half vesting 24 months after award, provided employment continues to the applicable vesting date. $1,000 Plan Under this plan, eligible employees receive up to $1,000 worth of Stockland securities. The security options granted under the three Security Plans are held at fair value. The valuation of security options is a key area of accounting estimation and judgement for the Group. LTI The fair value of LTI rights is measured at grant date using the Black-Scholes and Monte Carlo Simulation option pricing models taking into account the terms and conditions upon which the rights were granted. The fair value is expensed on a straight-line basis over the vesting period, the period over which the rights are subject to performance and service conditions, with a corresponding increase in reserves. Where the individual forfeits the rights due to failure to meet a service or performance condition, the cumulative expense is reversed through profit or loss in the current year. The cumulative expenditure for rights forfeited due to market conditions are not reversed. Where amendments are made to the terms and conditions subsequent to the grant, the value of the grant immediately prior to and following the modification is determined. This occurs upon resignation or termination where the amendment relates to rights becoming vested in terms of beneficial ownership, which would otherwise have been forfeited due to the failure to meet future service conditions. In this situation, the value that would have been recognised in future periods in respect of the rights not forfeited is recognised in the period that the rights vest. The number of rights granted to employees under the plan for the year ended 30 June 2019 was 3,564,400 (2018: 3,916,652). The number of LTI rights awarded is based on the Volume Weighted Average Price of Stockland securities for the ten working days post 30 June (face value methodology), this is consistent with the approach for determining number of Deferred STI awards. Assumptions made in determining the fair value of rights granted under the security plans are: Details Grant date Fair value of rights granted under plan Securities spot price at grant date Exercise price Distribution yield Risk-free rate at grant date Expected remaining life at grant date Volatility of Stockland Volatility of Index price 2019 2018 1 October 2018 27 September 2017 $2.48 $4.11 – 6.34% 2.05% 2.8 years 17% 14% $2.55 $4.27 – 6.0% 2.0% 2.8 years 19.0% 17.0% The LTI rights of 7,073,951 (2018: 7,865,999) are outstanding as at 30 June 2019, which have a fair value ranging from $1.50 to $2.07 (2018: $1.50 to $2.04) per right and a weighted average restricted period remaining of 1.5 years (2018: 1.5 years). During the year, 1,627,781 rights (2018: 1,997,042) vested and will convert to securities with a weighted average fair value of $2.82 (2018: $2.52). DSTI The fair value of securities granted under the DSTI has been calculated based on the 10 day volume weighted average price post 30 June 2019 of $4.44 (2018: $4.05). The DSTI outstanding as at 30 June 2019, included in the table above, are 2,121,166 (2018: 3,156,676). The DSTI outstanding have fair value ranging from $4.05 to $4.33 (2018: $4.00 to $4.84) per security. The number and weighted average fair value of LTI rights and DSTI securities under the Security Plans are as follows: $1,000 PLAN Details Opening balance Granted during the year Forfeited and lapsed during the year Rights converted to vested Stockland stapled securities Outstanding at the end of the year Weighted average price per right/security Number of rights/securities 2019 $2.97 $2.93 $2.72 $3.56 $2.79 2018 $3.04 $2.93 $2.30 2019 2018 11,022,675 11,551,943 4,923,260 5,951,652 (3,218,341) (2,524,555) $3.51 (3,532,477) (3,956,365) $2.97 9,195,117 11,022,675 Stockland securities issued to eligible employees under the Tax Exempt Employee Security Plan ($1,000 Plan) are recognised as an expense with a corresponding increase in issued capital. The value recognised is the market price of the securities granted at grant date. 154 155 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Taxation IN THIS SECTION This section sets out Stockland’s tax accounting policies and provides an analysis of the income tax expense/benefit and deferred tax balances, including a reconciliation of tax expense to accounting profit. Accounting income is not always the same as taxable income, creating temporary differences. These differences usually reverse over time. Until they reverse a deferred asset or liability must be recognised on the balance sheet, to the extent that it is probable that a reversal will take place. This is known as the balance sheet liability method. 20. INCOME TAX A. Income tax recognised in profit or loss Year ended 30 June $M Current tax Adjustments for prior years Current tax Tax losses recognised during the year1 Tax losses utilised during the year2 Capital losses utilised during the year2 Origination and reversal of temporary differences Deferred tax Income tax in profit or loss Stockland 2019 2018 – – – – (19) (4) (24) (47) (47) – – – 139 (14) (11) (55) 59 59 1 Tax losses and capital losses are fully recoverable based on the profitability of Stockland Corporation Group during the year and the latest available profit forecasts. 2 There is no current tax expense because tax and capital losses totalling $23 million (2018: $25 million) have been utilised to offset the Stockland Corporation Group's taxable income. B. Reconciliation of profit before tax to income tax recognised in profit or loss Year ended 30 June $M Profit before tax Less: Trust profit before tax Adjust for: Intergroup eliminations Profit before tax of Stockland Corporation Group Prima facie income tax calculated at 30% Impact on income tax recognised in profit or loss due to: Non-deductible expenses for the year Other deductible expense for the current period Tax losses recognised during the year Underprovided in prior years Income tax in profit or loss Effective tax rate (benefit)/expense Effective tax rate (excluding tax losses recognised) Tax benefit relating to items of other comprehensive income Year ended 30 June $M Fair value reserve Tax benefit relating to items of other comprehensive income Stockland 2019 358 (242) 13 129 (39) (12) 4 – – (47) 36% 36% 2018 966 (712) 9 263 (79) – – 139 (1) 59 (22%) 30% Stockland 2019 2018 – – 7 7 STOCKLAND Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income (OCI) or directly in equity. Income tax expense is calculated at the applicable corporate tax rate of 30%, and is comprised of current and deferred tax expense. Current tax expense represents the expense relating to the expected taxable income at the applicable tax rate for the financial year. Deferred tax expense represents the tax expense in respect of the future tax consequences of recovering or settling the carrying amount of an asset or liability. Tax consolidation Stockland Corporation Limited is head of the tax consolidated group which includes its wholly-owned Australian resident subsidiaries. As a consequence, all members of the tax consolidated group are taxed as a single entity. Members of the tax consolidated group have entered into a tax sharing agreement and a tax funding arrangement. The arrangement requires that Stockland Corporation Limited assumes the current tax liabilities and deferred tax assets arising from unused tax losses, with payments to or from subsidiaries settled via intergroup loan. Any subsequent period adjustments are recognised by Stockland Corporation Limited only and do not result in further amounts being payable or receivable under the tax funding arrangement. The tax liabilities of the entities included in the tax consolidated group will be governed by the tax sharing agreement should Stockland Corporation Limited default on its tax obligations. TRUST Under current Australian income tax legislation, Stockland Trust and its sub-trusts are not liable for income tax on their taxable income (including any assessable component of capital gains) provided that the unitholders are attributed the taxable income of the Trust. Securityholders are liable to pay tax at their effective tax rate on the amounts attributed. 21. DEFERRED TAX As at 30 June $M Inventories Investment properties Property, plant and equipment Payables Retirement Living resident obligations Provisions Reserves Tax losses carried forward Tax assets/(liabilities) Movement in temporary differences Assets 2019 2018 52 7 3 13 14 7 7 521 624 65 11 4 13 19 5 9 544 670 Stockland Liabilities 2019 (151) (433) 2018 (144) (438) – – – – – – – – – – – – (584) (582) Net 2019 (99) (426) 3 13 14 7 7 521 40 Recognised in Recognised in $M Inventories Investment properties Property, plant and equipment Other financial assets Payables Retirement Living resident obligations Provisions Reserves Tax losses carried forward Tax assets/(liabilities) 2017 (84) (372) (7) 6 13 22 5 9 430 22 Profit or loss OCI 5 (55) – (2) – (3) – – 114 59 – – 7 – – – – – – 7 Retained earnings1 Profit or loss – – – – (1) – – – – (1) (20) 1 – (1) 1 (5) 2 (2) (23) (47) 2018 (79) (427) – 4 13 19 5 9 544 88 1 Impact of adoption of new accounting standards recorded in retained earning on 1 July 2018. Refer to note 35 for further details. 2018 (79) (427) 4 13 19 5 9 544 88 2019 (99) (426) – 3 13 14 7 7 521 40 156 157 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 STOCKLAND A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax assets are reviewed for recoverability at each balance date and the recognised amount is adjusted as required. This is a key area of accounting estimation and judgement for the Group. Deferred tax is based upon the expected manner of realisation or settlement of the carrying amount of assets and liabilities using the applicable tax rates. Deferred tax arises due to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: • initial recognition of goodwill; • the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (for example acquisition of customer lists); and • differences relating to investments in subsidiaries to the extent that they are unlikely to reverse in the foreseeable future. RECOVERABILITY OF DEFERRED TAX ASSETS An assessment of the recoverability of the net deferred tax asset has been made to determine if the carrying value should be reduced with reference to the latest available profit forecasts, to determine the availability of suitable taxable profits or taxable temporary differences. The assessment for the current year determined that there is convincing evidence, based upon the profitability of Stockland Corporation Group during the year and latest available profit forecasts, that all income tax losses of the tax consolidated group have been recognised as deferred tax assets. This is consistent with the prior year. At each reporting period end, the net deferred tax asset will be assessed for recoverability. TRUST There are no deferred tax assets or liabilities in the Trust. As the Trust limits its activities to deriving income from renting commercial property, and attributes all of its taxable income each year to its investors, the Trust is not subject to tax. However, all of the annual taxable income is subject to tax in the hands of Stockland’s investors. The Trustee of Stockland Trust should be liable to pay tax to the extent that Stockland Trust does not distribute all of its ‘net income’, as determined under Stockland Trust’s trust deed. It is not anticipated that Stockland Trust will distribute less than its net income for the current year. Group structure IN THIS SECTION This section provides information which will help users understand how the Group structure affects the financial position and performance of the Group as a whole. The Group includes entities that are classified as joint ventures, joint operations, associates and structured entities. Joint ventures and associates are accounted for using the equity method, while joint operations are proportionately consolidated and structured entities are recorded as investments at cost. In this section of the notes there is information about: (1) Interests in joint operations; (2) Transactions with non-controlling interests; and (3) Changes to the structure that occurred during the year as a result of business combinations or the disposal of a discontinued operation. 22. EQUITY-ACCOUNTED INVESTMENTS Stockland and the Trust have interests in a number of individually immaterial joint ventures that are accounted for using the equity method. The Group did not have investments in associates at 30 June 2019 or 30 June 2018. A joint arrangement is either a venture or operation over whose activities the Group has joint control, established by contractual agreement. Investments in joint ventures are accounted for on an equity-accounted basis. Investments in joint ventures are assessed for impairment when indicators of impairment are present and if required, written down to the recoverable amount. Joint operations are discussed in note 23. The Group’s share of the joint venture’s profit or loss and other comprehensive income is from the date joint control commences until the date joint control ceases. If the Group’s share of losses exceeds its interest in a joint venture, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture. Transactions with the joint venture are eliminated to the extent of the Group’s interest in the joint venture until such time as they are realised by the joint venture on consumption or sale. The following table analyses, in aggregate, the carrying amount and share of profit or loss and other comprehensive income of these joint ventures. $M Aggregate carrying amount of individually immaterial joint ventures Aggregate share of: • profit from continuing operations • other comprehensive income Total comprehensive income The ownership interest in each of these immaterial entities is: % Brisbane Casino Towers Compam Property Management Pty Limited1 Eagle Street Pier Pty Limited Macquarie Park Trust Riverton Forum Pty Limited The King Trust2 Willeri Drive Trust3 1 Manager for The King Trust. 2 Owns 50% of the 135 King Street, Sydney NSW. 3 Owns 50% of the Stockland Riverton, Riverton WA. CHANGES TO JOINT VENTURES Stockland Trust 2019 612 2018 613 2019 620 2018 595 75 – 75 69 – 69 56 – 56 69 – 69 Stockland Trust 2019 2018 2019 2018 50 50 50 51 50 50 50 50 50 50 51 50 50 50 – 50 – 51 50 50 50 – 50 – 51 50 50 50 There have been no changes to the above listed investments in joint ventures during the financial year. 23. OTHER ARRANGEMENTS A. Investments in unconsolidated structured entities A 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. The Group considers all Retail Funds in which it currently holds an investment, and from which it currently earns fee income, to be structured entities. The Group holds an interest in a closed-end, unlisted property fund that invests in real estate assets in Australia for the purpose of generating investment income and for capital appreciation. The fund finances its operations through unitholder contributions and also through external banking facilities. The fund has been determined to meet the definition of a structured entity. SDRT No.1 As at 30 June 2019, Stockland held a 19.9% interest in SDRT No.1 (2018: 19.9%), valued at $8 million (2018: $8 million). The Group’s interest in this fund is included in the ‘Other Financial Assets’ line item on the balance sheet. The maximum exposure to risk for SDRT No.1 is the carrying value of its investment in the Fund. Note that at a Unitholder meeting in March 2019, the unitholders passed a resolution to wind-up the SDRT No 1 Trust and sell all of the properties. B. Joint operations Interests in unincorporated joint operations are consolidated by recognising the Group’s proportionate share of the joint operations’ assets, liabilities, revenues and expenses and the joint operation’s revenue from the sale of their share of goods or services on a line-by-line basis, from the date joint control commences to the date joint control ceases and are not included in the above table. 158 159 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 24. CONTROLLED ENTITIES The following entities were 100% controlled during the current and prior years: CONTROLLED ENTITIES OF STOCKLAND CORPORATION LIMITED Albert & Co Pty Ltd1 ARC Joint Ventures Pty. Ltd.1 Bayview Road Property Trust Bellevue Gardens Trust Endeavour (No. 2) Unit Trust Stockland Greenleaves Management Services Pty Limited Stockland Greenleaves Village Pty Limited Stockland Hibernian Investment Company Pty Limited1 Stockland Highett Pty Limited2 Stockland Highlands Pty Limited1 Stockland Aevum Limited1 Stockland Retail Services Pty Limited1 Stockland Aevum SPV Finance No. 1 Pty Limited Stockland Retirement Pty Limited1 Stockland Affinity Retirement Village Pty Limited Stockland Richmond Retirement Village Pty Limited Stockland Bellevue Gardens Pty Limited Stockland Ridgecrest Village Management Services Pty Limited Stockland Bells Creek Pty Limited1 Stockland Ridgecrest Village Pty Limited Stockland Birtinya Retirement Village Pty Limited1 Stockland RRV Pty Limited1 Stockland Buddina Pty Limited1 Stockland RVG (Queensland) Pty Limited Stockland Caboolture Waters Pty Limited1 Stockland Salford Living Pty Limited1 Stockland Caloundra Downs Pty Limited1 Stockland Scrip Holdings Pty Limited IOR Friendly Society Pty Limited1 Stockland Highlands Retirement Village Pty Limited Stockland Capital Partners Limited Stockland Selandra Rise Retirement Village Pty Limited Jimboomba Trust JT Bid Co No. 1 Pty Limited JT Bid Co No. 2 Pty Limited Knowles Property Management Unit Trust Knox Unit Trust Mayflower Investments Pty Ltd Merrylands Court Pty Limited Northpoint No. 1 Trust Northpoint No. 2 Trust Northpoint No. 3 Trust Northpoint No. 4 Trust Northpoint No. 5 Trust Northpoint No. 6 Trust Nowra Property Unit Trust Patterson Lakes Unit Trust Retirement Living Acquisition Trust Retirement Living Holding Trust No. 1 Retirement Living Holding Trust No. 2 Retirement Living Holding Trust No. 3 Retirement Living Holding Trust No. 4 Retirement Living Holding Trust No. 5 Retirement Living Holding Trust No. 6 Retirement Living Unit Trust No. 1 Retirement Living Unit Trust No. 2 Stockland Holding Trust No. 3 Stockland Holding Trust No. 4 Stockland Holding Trust No. 5 Stockland Holding Trust No. 6 Stockland IOR Group Pty Limited1 Stockland Kawana Waters Pty Limited1 Stockland Knox Village Pty Limited1 Stockland Lake Doonella Pty Limited1 Stockland Lensworth Glenmore Park Limited1 Stockland Lincoln Gardens Pty Limited Stockland Long Island Village Pty Limited1 Stockland Management Limited Stockland Maybrook Manor Pty Limited Stockland Care Foundation Pty Limited Stockland Care Foundation Trust Stockland Castlehaven Pty Limited Stockland Castleridge Pty Limited Stockland Catering Pty Limited Stockland Services Pty Limited1 Stockland Singapore Pte Ltd Stockland South Beach Pty Limited1 Stockland Syndicate No. 1 Trust Stockland Templestowe Retirement Village Pty Limited1 Stockland Development (Holdings) Pty Limited1 Stockland The Grove Retirement Village Pty Limited4 Stockland Development (NAPA NSW) Pty Limited1 Stockland The Hastings Valley Parklands Village Pty Limited Stockland Development (NAPA QLD) Pty Limited1 Stockland The Pines Retirement Village Pty Limited1 Stockland Development (NAPA VIC) Pty Limited1 Stockland Trust Management Limited Stockland Development (PHH) Pty Limited1 Stockland Vermont Retirement Village Pty Limited1 Stockland Development (PR1) Pty Limited Stockland WA (Estates) Pty Limited1 Stockland Development (PR2) Pty Limited Stockland WA Development (Realty) Pty Limited1 Stockland Development (PR3) Pty Limited Stockland WA Development (Vertu Sub 1) Pty Limited Stockland Mernda Retirement Village Pty Limited Stockland Development (PR4) Pty Limited Stockland WA Development Pty Limited1 Stockland Miami (Fund) Unit Trust Stockland Miami (Non-Fund) Unit Trust Stockland Miami (QLD) Pty Limited1 Stockland Development (Sub3) Pty Limited Stockland Wallarah Peninsula Management Pty Limited1 Stockland Development (Sub4) Pty Limited Stockland Wallarah Peninsula Pty Limited1 Stockland Development (Sub5) Pty Limited Stockland Wantirna Village Pty Limited1 Stockland Midlands Terrace Adult Community Pty Limited1 Stockland Development (Sub7) Pty Limited1 Stockland Willowdale Retirement Village Pty Limited Stockland Newport Retirement Village Pty Limited2 Stockland North Lakes Development Pty Limited1 Stockland North Lakes Pty Limited1 Stockland Oak Grange Pty Limited1 Stockland Ormeau Trust Stockland Patterson Village Pty Limited1 Stockland Development Pty Limited1 Stockland Direct Retail Trust No. 2 Stockland Willows Retirement Village Services Pty Limited Templestowe Unit Trust Stockland Epping Retirement Village Pty Limited The Mount Gravatt Retirement Village Unit Trust Stockland Eurofinance Pty Limited1 The Pine Lake Management Services Unit Trust Stockland Farrington Grove Retirement Village Pty Limited Toowong Place Pty Limited Stockland Financial Services Pty Limited1 Vermont Unit Trust Rogan’s Hill Retirement Village Trust Stockland Pine Lake Management Services Pty Limited Stockland Golden Ponds Forster Pty Limited SDRT 2 Property 1 Trust SDRT 2 Property 2 Trust SDRT 2 Property 3 Trust SDRT 2 Property 4 Trust Stockland (Boardwalk Sub 2) Pty Limited Stockland (Queensland) Pty. Limited1 Stockland (Russell Street) Pty Limited1 Stockland Pine Lake Village Pty Limited Stockland PR1 Trust Stockland PR2 Trust Stockland PR3 Trust Stockland PR4 Trust Stockland Property Management Pty Ltd1 Stockland Property Services Pty Limited1 Stockland A.C.N 116 788 713 Pty Limited1 Stockland Queenslake Village Pty Limited 1 These entities are parties to the Deed of Cross Guarantee and members of the Closed Group as at 30 June 2019. 2 These entities were incorporated in the current financial year. 3 These entities were sold or liquidated in the current financial year. 4 This entity changed its name during the financial year from Stockland Newport Retirement Village Pty Limited. The change was effective from 12 July 2018. 160 161 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 CONTROLLED ENTITIES OF STOCKLAND TRUST 9 Castlereagh Street Unit Trust Stockland Harrisdale Trust ADP Trust Advance Property Fund Capricornia Property Trust Endeavour (No. 1) Unit Trust Flinders Industrial Property Trust Stockland Industrial No. 1 Property 1 Trust Stockland Industrial No. 1 Property 4 Trust Stockland Industrial No. 1 Property 5 Trust Stockland Industrial No. 1 Property 6 Trust Stockland Industrial No. 1 Property 7 Trust Flinders Industrial Property Subtrust (No. 1) Stockland Industrial No. 1 Property 8 Trust Hervey Bay Holding Trust Hervey Bay Sub Trust Industrial Property Trust Stockland Industrial No. 1 Property 9 Trust Stockland Industrial No. 1 Property 11 Trust Stockland Marrickville Unit Trust Jimboomba Village Shopping Centre and Tavern Trust Stockland Mornington Unit Trust SDOT 4 Property # 1 Trust SDOT 4 Property # 2 Trust SDOT 4 Property # 3 Trust SDRT 1 Property # 3 Trust SDRT 3 Property # 1 Trust SDRT 3 Property # 2 Trust SDRT 3 Property # 3 Trust Shellharbour Property Trust Stockland Mulgrave Unit Trust Stockland North Ryde Unit Trust Stockland Padstow Unit Trust Stockland Parkinson Unit Trust Stockland Quarry Road Trust Stockland Retail Holding Sub-Trust No. 1 Stockland Retail Holding Trust No. 1 Sugarland Shopping Centre Trust Stockland Baringa Shopping Centre Trust Stockland Wholesale Office Trust No. 1 Stockland Bayswater Unit Trust Stockland Wholesale Office Trust No. 2 Stockland Birtinya Shopping Centre Trust Stockland Bundaberg Trust Stockland Brooklyn Industrial Trust Stockland Castlereagh Street Trust Stockland Direct Diversified Fund Stockland Direct Office Trust No. 4 Stockland Direct Retail Trust No. 3 Stockland Eastern Creek Trust Stockland Finance Holdings Pty Limited1 Stockland Richlands Unit Trust Stockland St Marys Unit Trust Stockland Tingalpa Unit Trust Stockland Truganina Industrial Trust Stockland Willawong Industrial Trust Stockland Wonderland Drive Property Trust SWOT2 Sub Trust No. 1 SWOT2 Sub Trust No. 2 SWOT2 Sub Trust No. 3 Stockland Finance Pty Limited1 Stockland Kemps Creek Industrial Trust2 1 These entities are parties to the Deed of Cross Guarantee (Finance) as at 30 June 2019. 2 These entities were formed/incorporated or acquired in the current financial year. All Stockland entities were formed/incorporated in Australia with the exception of Stockland Singapore Pte. Ltd. which is incorporated in Singapore. Stockland owns all the issued shares/units of the respective controlled entities (unless otherwise stated) and such shares/units carry the voting, dividend/distribution and equitable rights. 25. DEED OF CROSS GUARANTEE Stockland Corporation Limited and certain wholly-owned companies (the Closed Group) are parties to a Deed of Cross Guarantee (the Deed). The effect of the Deed is that the members of the Closed Group guarantee to each creditor, payment in full of any debt, in the event of winding up of any of the members under certain provisions of the Corporations Act 2001. ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 provides relief to parties to the Deed from the Corporations Act 2001 requirements for preparation, audit and lodgement of Financial Reports and Directors’ reports, subject to certain conditions as set out therein. Pursuant to the requirements of this instrument, a summarised consolidated statement of comprehensive income for the year ended 30 June 2019 and consolidated balance sheet as at 30 June 2019, comprising the members of the Closed Group after eliminating all transactions between members, are set out on the following pages. Consolidated balance sheet $M Cash and cash equivalents Receivables Inventories Other assets Non-current assets held for sale Current assets Receivables Inventories Investment properties Equity-accounted investments Other financial assets Property, plant and equipment Intangible assets Deferred tax assets Other assets Non-current assets Assets Payables Retirement Living resident obligations Provisions Other liabilities Current liabilities Payables Borrowings Retirement Living resident obligations Provisions Non-current liabilities Liabilities Net assets Issued capital Reserves Accumulated losses Securityholders’ equity Closed Group 2019 2018 50 101 1,007 15 1,173 – 1,173 16 2,500 2,349 – 38 31 156 40 3 5,133 6,306 571 1,322 357 20 2,270 147 2,972 38 396 3,553 5,823 483 1,298 2 (817) 483 90 58 707 22 877 43 920 15 2,749 2,234 25 38 27 119 88 – 5,295 6,215 638 1,207 575 33 2,453 173 2,770 38 383 3,364 5,817 398 1,313 2 (917) 398 162 163 Refer to the basis of preparation for comments on the net current asset deficiency position of the group. Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Summarised consolidated statement of comprehensive income $M Profit before tax Income tax Profit after tax Other comprehensive income Total comprehensive income Closed Group 2019 2018 129 (29) 100 – 100 157 59 216 (1) 215 Summarised movement in consolidated accumulated losses Closed Group $M Accumulated losses at 1 July Adjustment for entities added/removed Profit after tax Accumulated losses at 30 June 26. PARENT ENTITY DISCLOSURES $M Results for the year ended 30 June Profit for the year Other comprehensive income Total comprehensive income for the year Financial position as at 30 June Current assets Assets1 Current liabilities Liabilities Net assets Issued capital Reserves (Accumulated losses)/retained earnings Equity 1 There were no intangible assets as at 30 June 2019 (2018: $nil). PARENT ENTITY CONTINGENCIES 2019 (917) – 100 (817) 2018 (1,133) – 216 (917) Stockland Corporation Limited Stockland Trust 2019 2018 2019 2018 85 – 85 4,555 4,688 – 3,831 857 1,299 2 (444) 857 310 (1) 309 4,436 4,617 – 3,831 786 1,313 2 (529) 786 242 (6) 236 686 22 708 466 549 22,678 21,684 9,597 13,739 8,939 7,358 86 1,495 8,939 8,762 12,130 9,554 7,538 96 1,920 9,554 There are no contingencies within either parent entity as at 30 June 2019 (2018: $nil). PARENT ENTITY CAPITAL COMMITMENTS Neither parent entity has entered into any capital commitments as at 30 June 2019 (2018: $nil). ASIC DEED OF CROSS GUARANTEE Stockland Corporation Limited has entered into a Deed of Cross Guarantee with the effect that it has guaranteed debts in respect of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed are disclosed in note 25. Other items In this section This section includes information about the financial performance and position of the Group that must be disclosed to comply with the Accounting Standards, the Corporations Act 2001 or the Corporations Regulations 2001. 27. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOW A. Reconciliation of profit after tax to net cash flows from operating activities $M Profit after tax Adjustments for: Net impact on fair value hedges Net impact on derivatives Interest capitalised to investment properties Net impact on sale of non-current assets Net impact on other financial assets DMF base fee earned, unrealised Net write-back of inventories impairment provision Depreciation Straight-line rent adjustments Impairment of Retirement Living goodwill Net unrealised change in fair value of investment properties (including equity-accounted investments) Share of profits of equity-accounted investments, net of distributions received Equity-settled security based payments Other items Adjustments for movements: • Receivables • Other assets • Inventories • Deferred tax assets • Payables and other liabilities • Resident obligations (net of impact of village disposals) • Other provisions Net cash flows from operating activities Stockland Trust 2019 311 2018 1,025 2019 242 2018 712 – 12 (5) (17) (16) (26) (31) – 16 (6) – 7 133 (9) 21 – (26) 1 16 (3) 38 297 (180) – 12 (3) (69) (4) (40) 48 (169) 43 (210) 394 1 15 (9) 18 14 (974) (61) 337 112 503 728 6 134 (3) 21 – – – – (3) – 210 – – 7 (11) (10) – – (1) – – 12 (5) (10) – (16) – – – (6) – (109) 1 – 1 (5) 10 – – 14 – – 592 599 164 165 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 B. Reconciliation of movement in financial liabilities arising from financing activities 30. RELATED PARTY DISCLOSURES Stockland and Trust Non cash movements Opening balance Net cash flow Foreign exchange movements Fair value changes Closing balance 3,381 557 – 3,938 2,842 557 130 3,529 82 200 175 457 504 – (130) 374 10 – – 10 40 – – 40 299 – – 299 (5) – – (5) 3,772 757 175 4,704 3,381 557 – 3,938 $M Offshore medium term notes Domestic medium term notes Bank facilities and commercial paper 2019 Offshore medium term notes Domestic medium term notes Bank facilities and commercial paper 2018 28. CONTINGENT LIABILITIES KEEPING IT SIMPLE A contingent liability is a liability that is not sufficiently certain to qualify for recognition as a provision where uncertainty may exist regarding the outcome of future events. Contingent liabilities at 30 June 2019 comprise bank guarantees, letters of credit and insurance bonds. $M Bank guarantees, letters of credit and insurance bonds issued to semi and local government and other authorities against performance contracts, maximum facility $750 million (2018: $610 million) Stockland and Trust 2019 443 2018 421 29. COMMITMENTS A. Capital expenditure commitments Commitments for acquisition of land and future development costs not recognised in the financial statements at balance date are as follows: $M Inventory Investment property Capital expenditure commitments B. Operating lease commitments $M Within one year Later than one year but not later than five years Later than five years Operating lease commitments Stockland Trust 2019 395 106 501 2018 363 218 581 2019 2018 – 30 30 – 36 36 Stockland Trust 2019 2018 2019 2018 8 29 2 39 9 31 8 48 – – – – – – – – During the current financial year, $9 million was recognised as an expense in Stockland’s profit or loss in respect of operating leases (2018: $9 million). No operating lease expense was recognised in the Trust’s profit or loss. Year ended 30 June $’000s Responsible Entity fees Management and service fee Property management, tenancy design and leasing fees Rental income Finance income Revenue from related parties Responsible Entity fees Property management, tenancy design and leasing fees Recoupment of expenses Development management fee capitalised to investment property Expenses to related parties RESPONSIBLE ENTITY AND OTHER MANAGEMENT FEES Stockland Trust 2019 2018 2019 564 77 2,423 – – 2018 576 77 2,098 – – – – – 4,774 282,166 3,064 2,751 286,940 – – – – – – – – – – 37,700 28,304 63,156 6,183 135,343 – – – 5,125 266,448 271,573 37,583 28,567 66,382 23,657 156,189 Stockland received Responsible Entity and other Management Fees from the unlisted property funds managed by Stockland during the financial year. The Trust pays Responsible Entity fees to Stockland Trust Management Limited, calculated at 0.3% to 0.35% of gross assets of the Trust less intergroup loans (2018: 0.3 – 0.35%). Property management expenses and tenancy design fees were paid by the Trust to Stockland Trust Management Limited (the Responsible Entity) or its related parties provided in the normal course of business and on normal terms and conditions. RENTAL INCOME Rent was paid by Stockland Corporation Limited, a related party of the Responsible Entity to Stockland Trust in the normal course of business and on normal terms and conditions. FINANCE INCOME The Trust has an unsecured loan to Stockland Corporation Limited of $3,533,931 thousand (2018: $3,303,404 thousand) repayable in 2023. Interest on the loan is payable monthly in arrears at interest rates within the range of 7.5% to 8.2% during the year ended 30 June 2019 (2018: 7.7% to 8.1%). Interest was paid by Stockland Corporation Limited to Stockland Trust, a related party of the Responsible Entity provided in the normal course of business and on normal terms and conditions. DEVELOPMENT MANAGEMENT FEE A development management deed was executed between Stockland Trust and Stockland Development Pty Limited (a controlled entity of the Stockland Corporation Limited) effective 1 July 2012 in relation to a management fee in respect of Retail developments. The fee represents remuneration for the Corporation’s property development expertise and for developments which commenced after 1 July 2016 is calculated based on a fixed 4.0% of total development costs in line with recent changes to benchmark methodologies (for developments which commenced prior to 1 July 2016, the fee is calculated as 50.0% of the total valuation gain or loss on the completion of a development). Fees are paid by Stockland Trust to Stockland Development Pty Limited. Stockland has trade receivables of $381 thousand (2018: $379 thousand) due from the unlisted property funds. As at 30 June 2019, the carrying amount of Stockland’s investment in the unlisted property funds was $8,323 thousand (2018: $8,203 thousand). 166 167 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 31. PERSONNEL EXPENSES Year ended 30 June $M Wages and salaries (including on-costs) Equity-settled security based payment transactions Contributions to defined contribution plans Increase in annual and long service leave provisions Redundancy provision Personnel expenses PERSONNEL EXPENSES Stockland Trust 2019 210 12 14 3 6 245 2018 214 15 12 5 6 252 2019 2018 – – – – – – – – – – – – The total personnel expenses for the year was $245 million (2018: $252 million), which includes $12,407 thousand of equity-settled security based payment transactions (2018: $15,472 thousand). ANNUAL LEAVE Accrued annual leave of $13 million (2018: $12 million) is presented in current liabilities, since Stockland does not have an unconditional right to defer settlement for any of these obligations. Based on past experience, Stockland expects all employees to take the full amount of accrued leave within the next 12 months. LONG SERVICE LEAVE The current portion of long service leave includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The liability for long service leave expected to be settled more than 12 months from the balance date is recognised in the provision for employee benefits and measured as the present value of expected payments to be made in respect of services provided by employees up to the balance date. Consideration is given to expected future wage and salary levels, past experience of employee departures and periods of service. Expected future payments are discounted using market yields at the balance date on corporate bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. BONUS ENTITLEMENTS A liability is recognised in current trade and other payables for employee benefits in the form of employee bonus entitlements where there is a contractual obligation or where there is a past practice that has created a constructive obligation. Liabilities for employee bonus entitlements are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. SUPERANNUATION PLAN Stockland contributes to several defined contribution superannuation plans. Contributions are recognised as a personnel expense as they are incurred. The annual expense was $14,268 thousand (2018: $12,403 thousand). 32. KEY MANAGEMENT PERSONNEL DISCLOSURES Year ended 30 June $000’s Short term employee benefits Post-employment benefits Other long term benefits Termination benefits Security based payments Key management personnel compensation Stockland Trust 2019 8,631 255 68 817 2,872 12,643 2018 13,205 309 172 1,050 7,631 22,367 2019 2018 – – – – – – – – – – – – Information regarding individual Directors’ and Executives’ remuneration is provided in the Remuneration Report on pages 86 to 103 of the Directors’ Report. OTHER TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL There are transactions between the Group and entities with which key management personnel have an association. These transactions do not meet the definition of related parties since the key management personnel as individuals are not considered to have control or significant influence over the financial or operating activities of the respective non-Stockland entities. Furthermore, the terms and conditions of those transactions were no more favourable than those available, or might reasonably be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. From time to time key management personnel acquire Residential land lots from the Group. These purchases are at market rates and on an arm’s length basis. For FY19 this amounted to $518 thousand (2018: $nil) net of deposits received in FY18 of $58 thousand (2019: $nil). 33. AUDITOR’S REMUNERATION Year ended 30 June $000’s PricewaterhouseCoopers Australia Audit and review of Financial Report Audit of Unlisted Property Fund Financial Reports Regulatory audit and assurance services Other audit and assurance services Remuneration for audit services Other non-audit services Remuneration for non-audit services Auditor remuneration Stockland Trust 2019 2018 2019 2018 1,942 1,669 112 647 – 2,701 199 199 2,900 108 847 – 2,624 98 98 2,722 561 – 393 – 954 – – 954 565 – 587 – 1,152 – – 1,152 Auditor’s fees are paid by Stockland Development Pty Limited on behalf of the Group. 34. ACCOUNTING POLICIES KEEPING IT SIMPLE Accounting policies that apply to a specific category in the profit or loss or balance sheet have been included within the relevant notes. The accounting policies listed below are those that apply across a number of the Group’s profit or loss and balance sheet categories and are not specific to a single category. A. Principles of consolidation CONTROLLED ENTITIES The consolidated financial statements of the Group incorporate the assets, liabilities and results of all controlled entities. Controlled entities are all entities over which the parent entities Stockland or the Trust is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the relevant activities of the entity. Intergroup transactions, balances and unrealised gains on transactions between controlled entities are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. FOREIGN CURRENCY Transactions Foreign currency transactions are translated into the entity’s functional currency at the exchange rate on the transaction date. 168 169 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Assets and liabilities denominated in foreign currencies are translated to Australian dollars at balance date using the following applicable exchange rates: C. New and amended Accounting Standards MANDATORY IN FUTURE YEARS Foreign currency amount Monetary assets and liabilities Non-monetary assets and liabilities measured at historical cost Applicable exchange rate Balance date Date of transaction Non-monetary assets and liabilities measured at fair value Date fair value is determined Foreign exchange differences arising on translation are recognised in the profit or loss. Translation of financial reports of foreign operations Financial reports of foreign operations are translated to Australian dollars using the following applicable exchange rates: Foreign currency amount Revenues and expenses of foreign operations Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation Applicable exchange rate Date of transaction Balance date Equity items Historical rates The following foreign exchange differences are recognised directly in the foreign currency translation reserve, a separate component of equity: • foreign currency differences arising on translation of foreign operations; • exchange differences arising from the translation of the net investment in foreign entities and of related hedges (which are recycled into profit or loss upon disposal); and • foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future (which are monetary items considered to form part of the net investment in a foreign operation). B. Reserves EXECUTIVE REMUNERATION RESERVE The executive remuneration reserve arises due to the rights and deferred securities awarded under the LTI and DSTI being accounted for as security based payments. The fair value of the rights and deferred securities is recognised as an employee expense in profit or loss with a corresponding increase in the reserve over the vesting period. On vesting, the LTI and DSTI awards are settled by allocating treasury securities to the rights holder, the cost to acquire the treasury securities is recognised in the executive remuneration reserve by a transfer from treasury securities. Where rights are forfeited due to failure to satisfy a service or performance condition, the cumulative expense is reversed through profit or loss in the current year. The cumulative expenditure for rights which lapse due to failure to satisfy a market condition are transferred to retained earnings on expiry. Certain new accounting standards and interpretations have been published that are not mandatory for the year ended 30 June 2019. Stockland’s assessment of the impact of these new standards and interpretations is set out below. AASB 16 Leases (effective for annual reporting periods beginning on or after 1 January 2019) AASB 16 Leases replaces existing guidance, including AASB 117 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease. AASB 16 is effective for annual reporting periods beginning on or after 1 January 2019. The revised lease standard sets out a comprehensive model for identifying lease arrangements and subsequent measurement. Under the new standard, the lessee is required to recognise all right-of-use assets and corresponding lease liabilities on the balance sheet, with the exception of short term and low value leases. The right-of-use asset reflects the lease liability, direct costs and any adjustments for lease incentives or restoration. The lease liability is the net present value of future lease payments for the lease term, which incorporates any options reasonably expected to be exercised. The contracted cash flows are separated into principal repayments and interest components, using the effective interest rate method. Depreciation expense on the right-of-use asset and interest expense on the lease liability will now be recognised instead of a rental expense. An assessment has been performed based on each operating lease arrangement that exists in the current reporting period. The assessment confirmed that the new standard will not have a material impact on Stockland or the Trust. Based on the assessment performed, if AASB 16 had been adopted for the year ended 30 June 2019, a right-of-use asset and a lease liability would have been recognised on the balance sheet, while straight line rent liabilities would have been derecognised. Total assets and total liabilities would have increased by less than 1%, Net Assets would decrease by less than 1%. Statutory profit would decrease by less than 1%. The operating lease commitments would also have been adjusted accordingly. Lessor accounting remains largely unchanged, and hence there is no material impact on accounting for income from Stockland’s Retirement Living and Commercial Property businesses. 35. CHANGES IN ACCOUNTING POLICIES A. AASB 9 Financial Instruments The Group has adopted AASB 9 as issued in December 2014. The accounting policies were updated to comply with AASB 9. AASB 9 replaces the provisions of AASB 139 Financial Instruments: Recognition and Measurement that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. AASB 7 Financial Instruments: Disclosures was also amended to incorporate more extensive qualitative and quantitative disclosure requirement relating to AASB 9. Adoption of AASB 9 has resulted in a change in accounting policies and adjustments to certain amounts recognised in the financial statements. The new accounting policies apply to the period commenced 1 July 2018 and the policies in the 30 June 2018 annual financial statements apply to the comparative periods. CASH FLOW HEDGE RESERVE IMPACT OF FIRST TIME ADOPTION OF AASB 9 The cash flow hedge reserve is used to record the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges, refer to note 16. FAIR VALUE RESERVE The fair value reserve comprises the cumulative net change in the fair value of available for sale financial assets until the assets are derecognised or impaired. FOREIGN CURRENCY TRANSLATION RESERVE The foreign currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations and from derivatives used to hedge operations/funding. The Group has fully adopted AASB 9 using the modified retrospective approach, with the effect of initially applying the standard recognised as a transition adjustment to the opening balance sheet and retained earnings at the date of initial application of 1 July 2018. Comparatives for the 2018 financial year have therefore not been restated. The adoption of AASB 9 resulted in the following classification changes on initial application at 1 July 2018: Financial assets Trade receivables Other receivables Other assets Former classification under AASB 139 New classification under AASB 9 Loans and receivables Financial assets subsequently measured at amortised costs Loans and receivables Financial assets subsequently measured at amortised costs Loans and receivables Financial assets subsequently measured at amortised costs Available for sale financial assets Available for sale financial assets Financial assets subsequently measured at fair value through profit or loss or other comprehensive income Financial assets are classified based on the business model within which the asset is held and on the basis of the financial asset's contractual cash flow characteristics. The above changes in classification has not had any impact on measurement except as explained below. AASB 9 also introduces an expected credit loss (ECL) impairment model which differs significantly from the incurred loss approach under AASB 139. The ECL model is forward looking and does not require evidence of an actual loss event for an impairment provision to be recognised. 170 171 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Directors’ declaration (1) In the opinion of the Directors of Stockland Corporation Limited, and the Directors of the Responsible Entity of Stockland Trust, Stockland Trust Management Limited (collectively referred to as the Directors): (a) the financial statements and notes of Stockland Corporation Limited and its controlled entities, including Stockland Trust and its controlled entities (Stockland) and Stockland Trust and its controlled entities (Trust), set out on pages 108 to 172, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of Stockland’s and the Trust’s financial position as at 30 June 2019 and of their performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that both Stockland and the Trust will be able to pay their debts as and when they become due and payable. (2) There are reasonable grounds to believe that Stockland Corporation Limited and the Stockland entities identified in note 24 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between those Group entities pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. (3) Stockland Trust has operated during the year ended 30 June 2019 in accordance with the provisions of the Trust Constitution of 24 October 2006, as amended. (4) The Register of Unitholders has, during the year ended 30 June 2019, been properly drawn up and maintained so as to give a true account of the unitholders of the Stockland Trust. (5) The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the year ended 30 June 2019. (6) The Directors draw attention to the basis of preparation section to the financial statements, which includes a Statement of Compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Tom Pockett Chairman Dated at Sydney, 21 August 2019 Mark Steinert Managing Director For trade receivables, Stockland and the Trust apply the simplified approach to measuring expected credit losses as prescribed by AASB 9, which provides for the use of the lifetime expected loss provision for all trade receivables. There was an immaterial impact to Stockland’s financial asset provisions on adoption of AASB 9. The Trust has applied the new expected credit losses impairment model to the $3,288 million unsecured intergroup loan receivable from Stockland Corporation Limited which is repayable in 2023. While there has been no history of defaults, and the loan is considered to be low credit risk, an impairment provision determined as twelve months expected credit losses of $8 million has been recorded in retained earnings on adoption as follows. This loan eliminates on consolidation so there is no impact on Stockland. Consolidated balance sheet Trust $M Amount under AASB 139 30 June 2018 Amount under AASB 9 1 July 2018 Non-current receivables due from related companies Retained earnings 3,288 2,000 3,280 1,992 Decrease (8) (8) B. AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue, AASB 111 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The core principle of AASB 15 is that an entity recognises revenue related to the transfer of promised goods or services when control of the goods or service passes to the customer. It requires the identification of discrete performance obligations within a transaction and allocating an associated transaction price to these obligations. The Group adopted AASB 15 with effect from 1 July 2018. Adoption of AASB 15 has resulted in a change in accounting policies and adjustments to certain amounts recognised in the financial statements as noted below. The new accounting policies apply to the period commenced 1 July 2018 and the policies in the 30 June 2018 annual financial statements apply to the comparative periods. IMPACT OF FIRST TIME ADOPTION OF AASB 15 The Group has adopted AASB 15 using the modified retrospective approach, with the effect of initially applying the standard recognised as a transition adjustment to the opening balance sheet and retained earnings at the date of initial application of 1 July 2018. Comparatives for the 2018 financial year have therefore not been restated. There has been no change in the timing of recognition of revenue on adoption of this standard for property development sales and outgoings recoveries. Commercial Property rental income and Retirement Living DMF revenue continue to meet the definition of a lease arrangement and fall outside of the scope of AASB 15. AASB 15 requires incremental costs which are directly attributable to obtaining a contract (e.g. a sales commission) to be deferred and recognised as a capitalised cost to acquire a contract on balance sheet. This treatment is optional under AASB 15 where the related benefit (revenue) is expected to flow within one year or less of incurring the commission cost, which is the case for the majority of Residential land and Retirement Living sales. On adoption of AASB 15, a $4 million asset relating to capitalised cost to acquire a contract has been recorded at 1 July 2018, with a corresponding increase in retained earnings, in relation to Medium Density sales commissions incurred where settlements are not forecast to occur within one year. There will be an immaterial impact on the timing of the recognition of the commission expense in future periods. $M Consolidated statement of comprehensive income Management, administration, marketing and selling expenses: • residential sales commissions • amortisation expense (contract asset) Expense Consolidated balance sheet Non-current capitalised cost to acquire a contract Non-current deferred tax liabilities Retained earnings Stockland Amount under AASB 118 30 June 2018 Amount under AASB 15 1 July 2018 Increase/ (decrease) 5 – 5 – – – – 6 6 4 1 3 (5) 6 1 4 1 3 In addition to revenue generated directly from leases, which are accounted for in accordance with AASB 117, rent from investment properties includes non-lease revenue earned from tenants, predominantly in relation to recovery of asset operating costs (known as ‘outgoings’). This outgoings revenue is within the scope of AASB 15 and therefore recognised and measured under that standard. The outgoings recoveries element of external segment revenue is disclosed in note 1. 172 173 Stockland Annual Report 2019IntroductionStrategy andperformanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportSecurityholder information and key datesGlossaryYear ended 30 June 2019 Independent auditor’s report Independent auditor’s report To the stapled securityholders of Stockland and the unitholders of Stockland Trust Group Report on the audit of the financial report Our opinion In our opinion: The accompanying financial reports of Stockland, being the consolidated stapled entity, which comprises Stockland Corporation Limited and its controlled entities, and Stockland Trust and its controlled entities (together the “Stockland Trust Group” or the “Trust”) are in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the financial positions of Stockland and the Stockland Trust Group as at 30 June 2019 and of their financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The financial reports of Stockland and the Stockland Trust Group (the financial report) comprise: • • • • • • the consolidated balance sheet as at 30 June 2019 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flow for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of Stockland and the Stockland Trust Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 174 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y Our audit approach Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management opinion on the financial report as a whole, taking into account the geographic and management structure of Stockland and the Stockland Trust Group, their accounting processes and controls and the structure of Stockland and the Stockland Trust Group, their accounting processes and controls and the industry in which they operate. industry in which they operate. Materiality Materiality Audit scope Audit scope Key audit matters Key audit matters • Our audit focused on where • Our audit focused on where Stockland and the Stockland Stockland and the Stockland Trust Group made subjective Trust Group made subjective judgements; for example, judgements; for example, significant accounting significant accounting estimates involving estimates involving assumptions and inherently assumptions and inherently uncertain future events. uncertain future events. • The audit of Stockland and • The audit of Stockland and the Stockland Trust Group the Stockland Trust Group was performed by a team was performed by a team primarily based in Sydney. primarily based in Sydney. We ensured that the audit We ensured that the audit team possessed the team possessed the appropriate skills and appropriate skills and competencies needed for the competencies needed for the audits, and this included audits, and this included industry expertise in real industry expertise in real estate, as well as IT estate, as well as IT specialists, valuation, tax and specialists, valuation, tax and treasury professionals. treasury professionals. • Amongst other relevant topics, • Amongst other relevant topics, we communicated the we communicated the following key audit matters to following key audit matters to the Audit Committee: the Audit Committee: - Valuation of Investment - Valuation of Investment properties – Commercial properties – Commercial Property Property - Valuation of Investment - Valuation of Investment properties - Retirement properties - Retirement Living Living - Carrying value of inventory - Carrying value of inventory and cost of property and cost of property developments sold developments sold tax assets tax assets - Recoverability of deferred - Recoverability of deferred • These are further described in • These are further described in the Key audit matters section the Key audit matters section of our report. of our report. • • For the purpose of our audit For the purpose of our audit of Stockland and the of Stockland and the Stockland Trust Group, we Stockland Trust Group, we used overall materiality of used overall materiality of $44.8 million and $34.9 $44.8 million and $34.9 million, respectively, which million, respectively, which represents approximately 5% represents approximately 5% of Funds from Operations. of Funds from Operations. The metric is defined in note 2 The metric is defined in note 2 of the financial report. of the financial report. • We applied this threshold, • We applied this threshold, together with qualitative together with qualitative considerations, to determine considerations, to determine the scope of our audit and the the scope of our audit and the nature, timing and extent of nature, timing and extent of our audit procedures and to our audit procedures and to evaluate the effect of evaluate the effect of misstatements on the misstatements on the financial report as a whole. financial report as a whole. • We chose Funds from • We chose Funds from Operations because, in our Operations because, in our view, it is the primary metric view, it is the primary metric against which the against which the performance of Stockland is performance of Stockland is most commonly measured in most commonly measured in the industry. the industry. • We chose 5% based on our • We chose 5% based on our professional judgement, professional judgement, noting that it is within the common range relative to profit-based benchmarks. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period and were determined separately for Stockland and the Stockland Trust Group. Relevant amounts listed for each part of the stapled group represent balances as they were presented in the financial report and should not be aggregated. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. 175 Key audit matter How our audit addressed the key audit matter Valuation of Investment properties – Commercial Property (Refer to note 7) Stockland - $9,145 million Stockland Trust Group - $9,133 million portfolio (“Commercial Property”) is primarily comprised of retail town centres, logistics, and workplace investment properties, as well as properties under development. Stockland and the Trust’s Commercial Property We obtained a sample of publicly available property market reports to obtain an understanding of the prevailing conditions and trends in the markets in which Stockland and the Trust invest, and we compared these factors against the current year valuations. Commercial Properties are valued at fair value as at reporting date using a combination of the income We met with management and discussed the capitalisation method and the discounted cash flow specifics of selected individual properties method. The value of Commercial Properties is including, amongst other things, any significant dependent on the valuation methodology adopted new leases entered into during the year, lease and the inputs into the valuation model. Factors expiries, expectations for future leases, capital such as prevailing market conditions, the individual nature, condition and location of each expenditure and vacancy rates. property and the expected future income for each For a sample of leases we agreed the underlying property, directly impact fair values. Amongst following assumptions are key in establishing fair income used in the valuation and internal tolerance others, the value: average market rental growth • net market rent • • • capitalisation rate • discount rate terminal yield. At the end of each reporting period the directors determine the fair value of the Commercial Properties in accordance with their valuation policy as described in note 7. This was a key audit matter because of the: lease terms to the tenancy schedule and, for a sample of properties, we compared the rental check models to the tenancy schedule. We found that the data used in the samples tested was consistent with tenant leases. We discussed with management the rationale supporting the key assumptions adopted in the valuations, and compared them to comparable market data for reasonableness. For investment properties that were externally valued, we compared the valuations to the fair value listed in the accounting records of Stockland and the Trust, and assessed the reasonableness of the valuation methodology and the assumptions Stockland Annual Report 2019Year ended 30 June 2019 noting that it is within the noting that it is within the common range relative to common range relative to profit-based benchmarks. profit-based benchmarks. noting that it is within the common range relative to profit-based benchmarks. Key audit matters Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period and were determined separately for Stockland Key audit matters our audit of the financial report for the current period and were determined separately for Stockland and the Stockland Trust Group. Relevant amounts listed for each part of the stapled group represent Key audit matters are those matters that, in our professional judgement, were of most significance in and the Stockland Trust Group. Relevant amounts listed for each part of the stapled group represent balances as they were presented in the financial report and should not be aggregated. The key audit our audit of the financial report for the current period and were determined separately for Stockland balances as they were presented in the financial report and should not be aggregated. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming and the Stockland Trust Group. Relevant amounts listed for each part of the stapled group represent matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any balances as they were presented in the financial report and should not be aggregated. The key audit our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. matters were addressed in the context of our audit of the financial report as a whole, and in forming commentary on the outcomes of a particular audit procedure is made in that context. our opinion thereon, and we do not provide a separate opinion on these matters. Further, any How our audit addressed the key audit commentary on the outcomes of a particular audit procedure is made in that context. How our audit addressed the key audit matter matter How our audit addressed the key audit matter Key audit matter Key audit matter Key audit matter Valuation of Investment properties – Commercial Property Valuation of Investment properties – Commercial Property (Refer to note 7) (Refer to note 7) Stockland - $9,145 million Valuation of Investment properties – Commercial Property Stockland - $9,145 million Stockland Trust Group - $9,133 million (Refer to note 7) Stockland Trust Group - $9,133 million Stockland and the Trust’s Commercial Property Stockland - $9,145 million Stockland and the Trust’s Commercial Property portfolio (“Commercial Property”) is primarily portfolio (“Commercial Property”) is primarily Stockland Trust Group - $9,133 million comprised of retail town centres, logistics, and comprised of retail town centres, logistics, and Stockland and the Trust’s Commercial Property workplace investment properties, as well as workplace investment properties, as well as portfolio (“Commercial Property”) is primarily properties under development. properties under development. comprised of retail town centres, logistics, and workplace investment properties, as well as Commercial Properties are valued at fair value as at Commercial Properties are valued at fair value as at properties under development. reporting date using a combination of the income reporting date using a combination of the income capitalisation method and the discounted cash flow capitalisation method and the discounted cash flow Commercial Properties are valued at fair value as at method. The value of Commercial Properties is method. The value of Commercial Properties is reporting date using a combination of the income dependent on the valuation methodology adopted dependent on the valuation methodology adopted capitalisation method and the discounted cash flow and the inputs into the valuation model. Factors and the inputs into the valuation model. Factors method. The value of Commercial Properties is such as prevailing market conditions, the such as prevailing market conditions, the dependent on the valuation methodology adopted individual nature, condition and location of each individual nature, condition and location of each and the inputs into the valuation model. Factors property and the expected future income for each property and the expected future income for each such as prevailing market conditions, the property, directly impact fair values. Amongst property, directly impact fair values. Amongst individual nature, condition and location of each others, the others, the property and the expected future income for each following assumptions are key in establishing fair following assumptions are key in establishing fair property, directly impact fair values. Amongst value: value: others, the • net market rent • net market rent following assumptions are key in establishing fair • value: • • • net market rent • • discount rate • • discount rate • • • • discount rate • average market rental growth average market rental growth capitalisation rate capitalisation rate average market rental growth terminal yield. capitalisation rate terminal yield. At the end of each reporting period the directors At the end of each reporting period the directors determine the fair value of the Commercial determine the fair value of the Commercial Properties in accordance with their valuation policy Properties in accordance with their valuation policy At the end of each reporting period the directors as described in note 7. as described in note 7. determine the fair value of the Commercial Properties in accordance with their valuation policy This was a key audit matter because of the: This was a key audit matter because of the: as described in note 7. We obtained a sample of publicly available We obtained a sample of publicly available property market reports to obtain an property market reports to obtain an understanding of the prevailing conditions and understanding of the prevailing conditions and We obtained a sample of publicly available trends in the markets in which Stockland and the trends in the markets in which Stockland and the property market reports to obtain an Trust invest, and we compared these factors Trust invest, and we compared these factors understanding of the prevailing conditions and against the current year valuations. against the current year valuations. trends in the markets in which Stockland and the Trust invest, and we compared these factors We met with management and discussed the We met with management and discussed the against the current year valuations. specifics of selected individual properties specifics of selected individual properties including, amongst other things, any significant including, amongst other things, any significant We met with management and discussed the new leases entered into during the year, lease new leases entered into during the year, lease specifics of selected individual properties expiries, expectations for future leases, capital expiries, expectations for future leases, capital including, amongst other things, any significant expenditure and vacancy rates. expenditure and vacancy rates. new leases entered into during the year, lease expiries, expectations for future leases, capital For a sample of leases we agreed the underlying For a sample of leases we agreed the underlying expenditure and vacancy rates. lease terms to the tenancy schedule and, for a lease terms to the tenancy schedule and, for a sample of properties, we compared the rental sample of properties, we compared the rental For a sample of leases we agreed the underlying income used in the valuation and internal tolerance income used in the valuation and internal tolerance lease terms to the tenancy schedule and, for a check models to the tenancy schedule. We found check models to the tenancy schedule. We found sample of properties, we compared the rental that the data used in the samples tested was that the data used in the samples tested was income used in the valuation and internal tolerance consistent with tenant leases. consistent with tenant leases. check models to the tenancy schedule. We found that the data used in the samples tested was We discussed with management the rationale We discussed with management the rationale consistent with tenant leases. supporting the key assumptions adopted in the supporting the key assumptions adopted in the valuations, and compared them to comparable valuations, and compared them to comparable We discussed with management the rationale market data for reasonableness. market data for reasonableness. supporting the key assumptions adopted in the valuations, and compared them to comparable For investment properties that were externally For investment properties that were externally market data for reasonableness. valued, we compared the valuations to the fair valued, we compared the valuations to the fair value listed in the accounting records of Stockland value listed in the accounting records of Stockland For investment properties that were externally and the Trust, and assessed the reasonableness of and the Trust, and assessed the reasonableness of valued, we compared the valuations to the fair the valuation methodology and the assumptions the valuation methodology and the assumptions value listed in the accounting records of Stockland and the Trust, and assessed the reasonableness of the valuation methodology and the assumptions This was a key audit matter because of the: terminal yield. I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y Key audit matter Key audit matter Key audit matter Key audit matter • • • • • • • • relative size of the Commercial Property relative size of the Commercial Property portfolio to net assets and related relative size of the Commercial Property portfolio to net assets and related valuation movements and portfolio to net assets and related valuation movements and inherent subjectivity of the key relative size of the Commercial Property valuation movements and inherent subjectivity of the key assumptions that underpin the valuations. portfolio to net assets and related inherent subjectivity of the key assumptions that underpin the valuations. valuation movements and assumptions that underpin the valuations. inherent subjectivity of the key assumptions that underpin the valuations. • • • • • • • • How our audit addressed the key audit How our audit addressed the key audit matter How our audit addressed the key audit matter matter adopted for capitalisation and discount rates How our audit addressed the key audit adopted for capitalisation and discount rates relative to comparable market data. In addition, matter adopted for capitalisation and discount rates relative to comparable market data. In addition, for a sample of investment properties that were relative to comparable market data. In addition, for a sample of investment properties that were externally valued, we: adopted for capitalisation and discount rates for a sample of investment properties that were externally valued, we: relative to comparable market data. In addition, externally valued, we: for a sample of investment properties that were externally valued, we: evaluated the competence and capabilities evaluated the competence and capabilities of the relevant valuer, evaluated the competence and capabilities of the relevant valuer, read the valuers’ terms of engagement - we of the relevant valuer, read the valuers’ terms of engagement - we did not identify any terms that might have evaluated the competence and capabilities read the valuers’ terms of engagement - we did not identify any terms that might have affected their objectivity or imposed of the relevant valuer, did not identify any terms that might have affected their objectivity or imposed limitations on their work relevant to their read the valuers’ terms of engagement - we affected their objectivity or imposed limitations on their work relevant to their valuation, did not identify any terms that might have limitations on their work relevant to their valuation, • made inquiries of a sample of the external affected their objectivity or imposed valuation, • made inquiries of a sample of the external valuers as to their key considerations in limitations on their work relevant to their • made inquiries of a sample of the external valuers as to their key considerations in assessing fair value, and valuation, valuers as to their key considerations in assessing fair value, and • inspected the final valuation reports. • made inquiries of a sample of the external assessing fair value, and • inspected the final valuation reports. valuers as to their key considerations in • inspected the final valuation reports. assessing fair value, and inspected the final valuation reports. We also used quantitative and qualitative measures We also used quantitative and qualitative measures to determine those properties at greater risk of We also used quantitative and qualitative measures to determine those properties at greater risk of being carried at an amount above fair value and to determine those properties at greater risk of being carried at an amount above fair value and varied the nature and extent of audit testing to We also used quantitative and qualitative measures being carried at an amount above fair value and varied the nature and extent of audit testing to respond to the risk criteria identified. The to determine those properties at greater risk of varied the nature and extent of audit testing to respond to the risk criteria identified. The procedures conducted, amongst others, included: being carried at an amount above fair value and respond to the risk criteria identified. The procedures conducted, amongst others, included: varied the nature and extent of audit testing to procedures conducted, amongst others, included: compared the valuations to the fair value respond to the risk criteria identified. The compared the valuations to the fair value listed in the accounting records, procedures conducted, amongst others, included: compared the valuations to the fair value listed in the accounting records, assessed the reasonableness of the listed in the accounting records, assessed the reasonableness of the valuation methodology, compared the valuations to the fair value assessed the reasonableness of the valuation methodology, assessed the key assumptions adopted listed in the accounting records, valuation methodology, assessed the key assumptions adopted relative to industry benchmarks and assessed the reasonableness of the assessed the key assumptions adopted relative to industry benchmarks and market data, including comparable valuation methodology, relative to industry benchmarks and market data, including comparable transactions where possible, and assessed the key assumptions adopted market data, including comparable transactions where possible, and tested the mathematical accuracy of a relative to industry benchmarks and transactions where possible, and tested the mathematical accuracy of a sample of the valuation calculations. market data, including comparable tested the mathematical accuracy of a sample of the valuation calculations. transactions where possible, and sample of the valuation calculations. tested the mathematical accuracy of a sample of the valuation calculations. • • • • • • • • • • • • • • • • • Valuation of Investment properties - Retirement Living Valuation of Investment properties - Retirement Living (Refer to note 8) Valuation of Investment properties - Retirement Living (Refer to note 8) Stockland - $3,990 million (Refer to note 8) Stockland - $3,990 million Stockland Trust Group – this KAM is not applicable as the Trust does not invest in Retirement Living assets. Valuation of Investment properties - Retirement Living Stockland - $3,990 million Stockland Trust Group – this KAM is not applicable as the Trust does not invest in Retirement Living assets. Stockland’s Retirement Living portfolio (Refer to note 8) Stockland Trust Group – this KAM is not applicable as the Trust does not invest in Retirement Living assets. Stockland’s Retirement Living portfolio (“Retirement Living”) comprises retirement village Stockland - $3,990 million Stockland’s Retirement Living portfolio (“Retirement Living”) comprises retirement village investment properties, as well as properties under Stockland Trust Group – this KAM is not applicable as the Trust does not invest in Retirement Living assets. (“Retirement Living”) comprises retirement village investment properties, as well as properties under development. Stockland’s Retirement Living portfolio investment properties, as well as properties under development. (“Retirement Living”) comprises retirement village development. Retirement Living investment properties are investment properties, as well as properties under Retirement Living investment properties are valued at fair value at the reporting date using a development. Retirement Living investment properties are valued at fair value at the reporting date using a discounted cash flow analysis. The value of valued at fair value at the reporting date using a discounted cash flow analysis. The value of investment properties in this segment is dependent Retirement Living investment properties are discounted cash flow analysis. The value of investment properties in this segment is dependent on the terms of the residents’ contracts and the valued at fair value at the reporting date using a investment properties in this segment is dependent on the terms of the residents’ contracts and the inputs to the valuation model. Factors such as discounted cash flow analysis. The value of on the terms of the residents’ contracts and the inputs to the valuation model. Factors such as prevailing market conditions, the individual investment properties in this segment is dependent inputs to the valuation model. Factors such as prevailing market conditions, the individual on the terms of the residents’ contracts and the prevailing market conditions, the individual inputs to the valuation model. Factors such as prevailing market conditions, the individual Together with the PwC valuation expert, we had Together with the PwC valuation expert, we had discussions with management, and read market Together with the PwC valuation expert, we had discussions with management, and read market research and reports to obtain an understanding of discussions with management, and read market research and reports to obtain an understanding of the prevailing conditions and trends in the markets Together with the PwC valuation expert, we had research and reports to obtain an understanding of the prevailing conditions and trends in the markets in which Stockland invests, and we compared those discussions with management, and read market the prevailing conditions and trends in the markets in which Stockland invests, and we compared those factors against the current year valuations. research and reports to obtain an understanding of in which Stockland invests, and we compared those factors against the current year valuations. the prevailing conditions and trends in the markets factors against the current year valuations. We met with management and discussed the in which Stockland invests, and we compared those We met with management and discussed the specifics of selected individual properties factors against the current year valuations. We met with management and discussed the specifics of selected individual properties including, amongst other things, vacancy rates, specifics of selected individual properties including, amongst other things, vacancy rates, growth rates, discount rates, unit values, and We met with management and discussed the including, amongst other things, vacancy rates, growth rates, discount rates, unit values, and capital expenditure. specifics of selected individual properties growth rates, discount rates, unit values, and capital expenditure. including, amongst other things, vacancy rates, capital expenditure. growth rates, discount rates, unit values, and capital expenditure. 176 177 Stockland Annual Report 2019Year ended 30 June 2019 Key audit matter How our audit addressed the key audit matter nature, condition and location of each property and For a sample of resident contracts across the the expected future income for each property portfolio, we compared the terms used in the directly impact fair values. Amongst others, the valuations to underlying contracts. We found that • • • • • an following assumptions are key in establishing fair value: • discount rates growth rates average length of stay of existing and future residents current market value of units renovation / reinstatement costs renovation recoupment. The Stockland valuation policy requires that all key valuation assumptions be externally appraised by external valuation expert each reporting period. In addition, at each reporting period a selection of properties are individually valued by an external valuation expert. This was a key audit matter because of the: • • relative size of the Retirement Living portfolio to net assets and related valuation movements, and inherent subjectivity of the key assumptions that underpin the valuations. the data used in the samples tested was materially consistent with the sampled resident contracts. We discussed with management the rationale supporting the key assumptions adopted in the valuations, and compared them to the valuation expert’s report and market data. For the external review of key valuation assumptions obtained by management, we also: • • • • assessed the competency and capabilities of the relevant external expert, read the expert’s terms of engagement - we did not identify any terms that might affect their objectivity or impose limitations on their work relevant to their valuation assessment, assessed the reasonableness of the assumptions adopted relative to comparable market data, and inspected the final valuation assessment and compared the assumptions to those used in Stockland’s valuation model. For a sample of Retirement Living property valuations, we: • • • • compared the resident information used in the valuation model to a sample of resident contracts, assessed the design and operating effectiveness of the relevant key controls over the valuation model and the associated key assumptions used by Stockland to satisfy ourselves that the model was operating as designed, tested the mathematical accuracy of a sample of the valuation calculations, and examined the property valuations undertaken by management’s expert and compared them with the outputs from the valuation model. Carrying value of inventory and cost of property developments sold (Refer to note 6) Stockland - $3,505 million Stockland Trust Group – this KAM is not applicable as the Trust does not hold inventory assets. Key audit matter Key audit matter How our audit addressed the key audit How our audit addressed the key audit matter matter Carrying value of inventory Carrying value of inventory Stockland has a portfolio of residential Stockland has a portfolio of residential development projects that it develops for future development projects that it develops for future sale, which are classified as inventory. Stockland’s sale, which are classified as inventory. Stockland’s inventory is accounted for at the lower of the cost inventory is accounted for at the lower of the cost and net realisable value for each inventory project, and net realisable value for each inventory project, as assessed at each reporting date. as assessed at each reporting date. The cost of the inventory is calculated using actual The cost of the inventory is calculated using actual land acquisition costs, construction costs, land acquisition costs, construction costs, development related costs and interest capitalised development related costs and interest capitalised for eligible projects. for eligible projects. Net realisable value is calculated based on the Net realisable value is calculated based on the estimated selling price of the inventory, less the estimated selling price of the inventory, less the estimated costs of completion, including forecast estimated costs of completion, including forecast capitalised interest, and associated selling costs. capitalised interest, and associated selling costs. Each of these factors is impacted by expected Each of these factors is impacted by expected future market and economic conditions which future market and economic conditions which include sales prices, sales rates and development include sales prices, sales rates and development costs. costs. Where an inventory project’s net realisable value is Where an inventory project’s net realisable value is lower than its cost, the inventory project is written lower than its cost, the inventory project is written down to its net realisable value under Australian down to its net realisable value under Australian Accounting Standards. Accounting Standards. Cost of property developments sold Cost of property developments sold When inventory is sold by Stockland the carrying When inventory is sold by Stockland the carrying amount of the relevant inventory is recognised as amount of the relevant inventory is recognised as an expense in the same period that the sale is an expense in the same period that the sale is recognised. The expense recognised is based recognised. The expense recognised is based directly upon the forecast profit margin for the directly upon the forecast profit margin for the relevant project as a whole, and results in the relevant project as a whole, and results in the recognition of a profit margin in the period the recognition of a profit margin in the period the inventory is sold. To the extent that expected future inventory is sold. To the extent that expected future costs exceed expected future revenues the costs exceed expected future revenues the inventory is written down to its net realisable inventory is written down to its net realisable value. value. These were key audit matters because of the: These were key audit matters because of the: • • • • relative size of the inventory balance to net relative size of the inventory balance to net assets, and assets, and inherent subjectivity of the key inherent subjectivity of the key assumptions that underpin net realisable assumptions that underpin net realisable value, and the profit margin recognised. value, and the profit margin recognised. We obtained a sample of the publicly available We obtained a sample of the publicly available property market reports to obtain an property market reports to obtain an understanding of the prevailing conditions and understanding of the prevailing conditions and trends in the markets in which Stockland invests, trends in the markets in which Stockland invests, and we compared those factors against the and we compared those factors against the assumptions adopted in the current year’s assumptions adopted in the current year’s assessment of net realisable value of inventory. assessment of net realisable value of inventory. For each project we discussed with management For each project we discussed with management matters such as the overall project strategy and matters such as the overall project strategy and forecast profitability. forecast profitability. Using the information gained from these Using the information gained from these discussions and our existing knowledge of the discussions and our existing knowledge of the business, we used a risk based approach to select a business, we used a risk based approach to select a sample of projects on which to perform further sample of projects on which to perform further procedures over the net realisable value and procedures over the net realisable value and margin recognition. margin recognition. For the sample of projects selected we: For the sample of projects selected we: • Further discussed with management the • Further discussed with management the life cycle of the project, key project risks, life cycle of the project, key project risks, changes to project strategy, current and changes to project strategy, current and future estimated sales prices, development future estimated sales prices, development progress and costs and any new and progress and costs and any new and previous write downs. previous write downs. • Obtained Stockland’s model of the • Obtained Stockland’s model of the project’s forecast future returns, known as project’s forecast future returns, known as feasibility models, and tested the feasibility models, and tested the mathematical accuracy of the model to mathematical accuracy of the model to satisfy ourselves that it was operating satisfy ourselves that it was operating effectively. effectively. • Compared the estimated selling prices to • Compared the estimated selling prices to market sales data in similar locations or, market sales data in similar locations or, where available, to recent sales in the where available, to recent sales in the project. project. • Compared the forecast costs to complete • Compared the forecast costs to complete the project to the relevant construction the project to the relevant construction contracts (if applicable) or the contracts (if applicable) or the construction contract proposals. construction contract proposals. • Tested the mathematical accuracy of a • Tested the mathematical accuracy of a sample of the feasibility models. sample of the feasibility models. • Compared the carrying value to the • Compared the carrying value to the project’s net realisable value (NRV). project’s net realisable value (NRV). In addition we: In addition we: • Traced a sample of additions to the cost of • Traced a sample of additions to the cost of the project (e.g. development costs) to the project (e.g. development costs) to invoices and verified that they were valid invoices and verified that they were valid costs that could be capitalised. costs that could be capitalised. 179 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y Key audit matter Key audit matter nature, condition and location of each property and nature, condition and location of each property and the expected future income for each property the expected future income for each property directly impact fair values. Amongst others, the directly impact fair values. Amongst others, the following assumptions are following assumptions are key in establishing fair value: key in establishing fair value: • discount rates • discount rates • growth rates • growth rates • average length of stay of existing and • average length of stay of existing and future residents future residents • current market value of units • current market value of units • renovation / reinstatement costs • renovation / reinstatement costs • renovation recoupment. • renovation recoupment. The Stockland valuation policy requires that all key The Stockland valuation policy requires that all key valuation assumptions be externally appraised by valuation assumptions be externally appraised by an an external valuation expert each reporting period. In external valuation expert each reporting period. In addition, at each reporting period a selection of addition, at each reporting period a selection of properties are individually valued by an external properties are individually valued by an external valuation expert. valuation expert. This was a key audit matter because of the: This was a key audit matter because of the: relative size of the Retirement Living relative size of the Retirement Living portfolio to net assets and related portfolio to net assets and related valuation movements, and valuation movements, and inherent subjectivity of the key inherent subjectivity of the key assumptions that underpin the valuations. assumptions that underpin the valuations. • • • • How our audit addressed the key audit How our audit addressed the key audit matter matter For a sample of resident contracts across the For a sample of resident contracts across the portfolio, we compared the terms used in the portfolio, we compared the terms used in the valuations to underlying contracts. We found that valuations to underlying contracts. We found that the data used in the samples tested was materially the data used in the samples tested was materially consistent with the sampled resident contracts. consistent with the sampled resident contracts. We discussed with management the rationale We discussed with management the rationale supporting the key assumptions adopted in the supporting the key assumptions adopted in the valuations, and compared them to the valuation valuations, and compared them to the valuation expert’s report and market data. expert’s report and market data. For the external review of key valuation For the external review of key valuation assumptions obtained by management, we also: assumptions obtained by management, we also: assessed the competency and capabilities assessed the competency and capabilities of the relevant external expert, of the relevant external expert, read the expert’s terms of engagement - we read the expert’s terms of engagement - we did not identify any terms that might did not identify any terms that might affect their objectivity or impose affect their objectivity or impose limitations on their work relevant to their limitations on their work relevant to their valuation assessment, valuation assessment, assessed the reasonableness of the assessed the reasonableness of the assumptions adopted relative to assumptions adopted relative to comparable market data, and comparable market data, and inspected the final valuation assessment inspected the final valuation assessment and compared the assumptions to those and compared the assumptions to those used in Stockland’s valuation model. used in Stockland’s valuation model. • • • • • • • • For a sample of Retirement Living property For a sample of Retirement Living property valuations, we: valuations, we: • • • • • • • • compared the resident information used in compared the resident information used in the valuation model to a sample of the valuation model to a sample of resident contracts, resident contracts, assessed the design and operating assessed the design and operating effectiveness of the relevant key controls effectiveness of the relevant key controls over the valuation model and the over the valuation model and the associated key assumptions used by associated key assumptions used by Stockland to satisfy ourselves that the Stockland to satisfy ourselves that the model was operating as designed, model was operating as designed, tested the mathematical accuracy of a tested the mathematical accuracy of a sample of the valuation calculations, and sample of the valuation calculations, and examined the property valuations examined the property valuations undertaken by management’s expert and undertaken by management’s expert and compared them with the outputs from the compared them with the outputs from the valuation model. valuation model. Carrying value of inventory and cost of property developments sold Carrying value of inventory and cost of property developments sold (Refer to note 6) (Refer to note 6) Stockland - $3,505 million Stockland - $3,505 million Stockland Trust Group – this KAM is not applicable as the Trust does not hold inventory assets. Stockland Trust Group – this KAM is not applicable as the Trust does not hold inventory assets. 178 Stockland Annual Report 2019Year ended 30 June 2019 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y responsible for the other information. The other information comprises the information included in responsible for the other information. The other information comprises the information included in the Annual Report for the year ended 30 June 2019, but does not include the financial report and our responsible for the other information. The other information comprises the information included in the Annual Report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. the Annual Report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. express any form of assurance conclusion thereon. In connection with our audit of the financial report , our responsibility is to read the other information In connection with our audit of the financial report , our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial In connection with our audit of the financial report , our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report Responsibilities of the directors for the financial report Responsibilities of the directors for the financial report The directors are responsible for the preparation of the financial report that gives a true and fair view The directors are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such The directors are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. error. In preparing the financial report, the directors are responsible for assessing the ability of Stockland In preparing the financial report, the directors are responsible for assessing the ability of Stockland and the Stockland Trust Group to continue as a going concern, disclosing, as applicable, matters In preparing the financial report, the directors are responsible for assessing the ability of Stockland and the Stockland Trust Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either and the Stockland Trust Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate Stockland and the Stockland Trust Group or to cease operations, or have no related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate Stockland and the Stockland Trust Group or to cease operations, or have no realistic alternative but to do so. intend to liquidate Stockland and the Stockland Trust Group or to cease operations, or have no realistic alternative but to do so. realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Auditor’s responsibilities for the audit of the financial report Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. auditor's report. Report on the remuneration report Report on the remuneration report Report on the remuneration report Our opinion on the remuneration report Our opinion on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 90 to 107 of the directors’ report for the We have audited the remuneration report included in pages 90 to 107 of the directors’ report for the year ended 30 June 2019. We have audited the remuneration report included in pages 90 to 107 of the directors’ report for the year ended 30 June 2019. year ended 30 June 2019. Key audit matter Key audit matter How our audit addressed the key audit matter How our audit addressed the key audit matter How our audit addressed the key audit How our audit addressed the key audit matter matter Key audit matter Key audit matter • Recalculated the cost of property • Recalculated the cost of property • Checked that interest was capitalised for qualifying assets and recalculated the • Checked that interest was capitalised for interest capitalised during the period. qualifying assets and recalculated the • Traced a sample of sales recorded to the • Checked that interest was capitalised for interest capitalised during the period. underlying sale documents and the receipt • Checked that interest was capitalised for qualifying assets and recalculated the • Traced a sample of sales recorded to the of cash. qualifying assets and recalculated the interest capitalised during the period. underlying sale documents and the receipt • Recalculated the cost of property interest capitalised during the period. • Traced a sample of sales recorded to the of cash. developments sold recognised for the • Traced a sample of sales recorded to the underlying sale documents and the receipt • Recalculated the cost of property sample of sales recorded based on the underlying sale documents and the receipt of cash. developments sold recognised for the relevant project’s forecast profit margin. of cash. sample of sales recorded based on the Recoverability of deferred tax assets developments sold recognised for the relevant project’s forecast profit margin. (Refer to note 21) developments sold recognised for the sample of sales recorded based on the Recoverability of deferred tax assets sample of sales recorded based on the Stockland - $40 million relevant project’s forecast profit margin. (Refer to note 21) relevant project’s forecast profit margin. Stockland Trust Group – this KAM is not applicable as while the Trust generates taxable profits each year, Recoverability of deferred tax assets Stockland - $40 million Recoverability of deferred tax assets this Trust income is distributable each year in full and is taxed in the hands of the unitholders as a Trust (Refer to note 21) Stockland Trust Group – this KAM is not applicable as while the Trust generates taxable profits each year, (Refer to note 21) Distribution. Stockland - $40 million this Trust income is distributable each year in full and is taxed in the hands of the unitholders as a Trust Stockland - $40 million Stockland Trust Group – this KAM is not applicable as while the Trust generates taxable profits each year, Distribution. Stockland recognised a net deferred tax asset The recoverability of the DTA and carried forward Stockland Trust Group – this KAM is not applicable as while the Trust generates taxable profits each year, this Trust income is distributable each year in full and is taxed in the hands of the unitholders as a Trust (“DTA”) of $40 million at 30 June 2019, tax losses, and the period over which they will be this Trust income is distributable each year in full and is taxed in the hands of the unitholders as a Trust Distribution. The recoverability of the DTA and carried forward Stockland recognised a net deferred tax asset comprising a deferred tax asset of $624 million and used, depends upon the forecast profitability of the Distribution. tax losses, and the period over which they will be (“DTA”) of $40 million at 30 June 2019, Stockland Corporation Limited tax consolidated a deferred tax liability of $584 million. The recoverability of the DTA and carried forward Stockland recognised a net deferred tax asset used, depends upon the forecast profitability of the comprising a deferred tax asset of $624 million and group (“SCL”). The recoverability of the DTA and carried forward Stockland recognised a net deferred tax asset tax losses, and the period over which they will be (“DTA”) of $40 million at 30 June 2019, Stockland Corporation Limited tax consolidated a deferred tax liability of $584 million. The availability of tax losses is dependent on the tax losses, and the period over which they will be (“DTA”) of $40 million at 30 June 2019, used, depends upon the forecast profitability of the comprising a deferred tax asset of $624 million and group (“SCL”). satisfaction of either the continuity of ownership Our audit work focussed on the review of the Board used, depends upon the forecast profitability of the comprising a deferred tax asset of $624 million and Stockland Corporation Limited tax consolidated a deferred tax liability of $584 million. The availability of tax losses is dependent on the test approved forecast which supports the strategic and Stockland Corporation Limited tax consolidated a deferred tax liability of $584 million. group (“SCL”). satisfaction of either the continuity of ownership (“COT”) or, where this fails, the same business test Our audit work focussed on the review of the Board operational plans of Stockland, including SCL. We group (“SCL”). The availability of tax losses is dependent on the test (“SBT”) under the Income Tax Assessment Act approved forecast which supports the strategic and The availability of tax losses is dependent on the then examined SCL’s taxable profit forecasts to satisfaction of either the continuity of ownership Our audit work focussed on the review of the Board (“COT”) or, where this fails, the same business test 1997. Where either of these tests is satisfied, a DTA operational plans of Stockland, including SCL. We satisfaction of either the continuity of ownership Our audit work focussed on the review of the Board assess whether key assumptions were consistent test approved forecast which supports the strategic and (“SBT”) under the Income Tax Assessment Act is recognised to the extent there is an offsetting test then examined SCL’s taxable profit forecasts to approved forecast which supports the strategic and (“COT”) or, where this fails, the same business test with Stockland’s board approved forecast. In operational plans of Stockland, including SCL. We 1997. Where either of these tests is satisfied, a DTA deferred tax liability (“DTL”), and tax losses in (“COT”) or, where this fails, the same business test assess whether key assumptions were consistent (“SBT”) under the Income Tax Assessment Act operational plans of Stockland, including SCL. We addition, we used PwC tax experts to assist in our is recognised to the extent there is an offsetting addition to the offsetting DTL are recognised to the then examined SCL’s taxable profit forecasts to (“SBT”) under the Income Tax Assessment Act 1997. Where either of these tests is satisfied, a DTA with Stockland’s board approved forecast. In then examined SCL’s taxable profit forecasts to consideration of Stockland’s assessment that tax deferred tax liability (“DTL”), and tax losses in extent that there is evidence that the generation of assess whether key assumptions were consistent 1997. Where either of these tests is satisfied, a DTA is recognised to the extent there is an offsetting addition, we used PwC tax experts to assist in our assess whether key assumptions were consistent addition to the offsetting DTL are recognised to the losses would be available for the relevant periods. future taxable profit against which the unused tax with Stockland’s board approved forecast. In is recognised to the extent there is an offsetting deferred tax liability (“DTL”), and tax losses in consideration of Stockland’s assessment that tax extent that there is evidence that the generation of losses can be utilised is considered probable. with Stockland’s board approved forecast. In deferred tax liability (“DTL”), and tax losses in addition, we used PwC tax experts to assist in our addition to the offsetting DTL are recognised to the losses would be available for the relevant periods. future taxable profit against which the unused tax addition, we used PwC tax experts to assist in our addition to the offsetting DTL are recognised to the consideration of Stockland’s assessment that tax extent that there is evidence that the generation of losses can be utilised is considered probable. Stockland estimates the likely forecast taxable consideration of Stockland’s assessment that tax extent that there is evidence that the generation of losses would be available for the relevant periods. future taxable profit against which the unused tax profits each year based on current and approved losses would be available for the relevant periods. future taxable profit against which the unused tax losses can be utilised is considered probable. Stockland estimates the likely forecast taxable Board strategies to assess the utilisation period of losses can be utilised is considered probable. profits each year based on current and approved recognised tax losses. Stockland estimates the likely forecast taxable Board strategies to assess the utilisation period of Stockland estimates the likely forecast taxable profits each year based on current and approved recognised tax losses. This was a key audit matter because of the size of profits each year based on current and approved Board strategies to assess the utilisation period of the gross DTA and DTL. Board strategies to assess the utilisation period of recognised tax losses. This was a key audit matter because of the size of recognised tax losses. the gross DTA and DTL. This was a key audit matter because of the size of This was a key audit matter because of the size of the gross DTA and DTL. the gross DTA and DTL. Other information The directors of Stockland Corporation Limited and the directors of Stockland Trust Management Other information Limited, the Responsible Entity for Stockland Trust, (collectively referred to as “the directors”) are Other information The directors of Stockland Corporation Limited and the directors of Stockland Trust Management Other information Limited, the Responsible Entity for Stockland Trust, (collectively referred to as “the directors”) are The directors of Stockland Corporation Limited and the directors of Stockland Trust Management The directors of Stockland Corporation Limited and the directors of Stockland Trust Management Limited, the Responsible Entity for Stockland Trust, (collectively referred to as “the directors”) are Limited, the Responsible Entity for Stockland Trust, (collectively referred to as “the directors”) are 180 181 Stockland Annual Report 2019Year ended 30 June 2019 responsible for the other information. The other information comprises the information included in responsible for the other information. The other information comprises the information included in the Annual Report for the year ended 30 June 2019, but does not include the financial report and our the Annual Report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. express any form of assurance conclusion thereon. In connection with our audit of the financial report , our responsibility is to read the other information In connection with our audit of the financial report , our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report Responsibilities of the directors for the financial report The directors are responsible for the preparation of the financial report that gives a true and fair view The directors are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such 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 internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. error. In preparing the financial report, the directors are responsible for assessing the ability of Stockland In preparing the financial report, the directors are responsible for assessing the ability of Stockland and the Stockland Trust Group to continue as a going concern, disclosing, as applicable, matters and the Stockland Trust Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate Stockland and the Stockland Trust Group or to cease operations, or have no intend to liquidate Stockland and the Stockland Trust Group or to cease operations, or have no realistic alternative but to do so. realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. auditor's report. Report on the remuneration report Report on the remuneration report Our opinion on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 90 to 107 of the directors’ report for the We have audited the remuneration report included in pages 86 to 103 of the directors’ report for the year ended 30 June 2019. year ended 30 June 2019. In our opinion, the remuneration report of Stockland and the Stockland Trust Group for the year In our opinion, the remuneration report of Stockland and the Stockland Trust Group for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities Responsibilities The directors are responsible for the preparation and presentation of the remuneration report in The directors are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an 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 In our opinion, the remuneration report of Stockland and the Stockland Trust Group for the year opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Auditing Standards. Responsibilities In our opinion, the remuneration report of Stockland and the Stockland Trust Group for the year The directors are responsible for the preparation and presentation of the remuneration report in ended 30 June 2019 complies with section 300A of the Corporations Act 2001. accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an PricewaterhouseCoopers PricewaterhouseCoopers opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Responsibilities Securityholder information and key dates The directors are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers NR McConnell NR McConnell Partner Partner SJ Hadfield SJ Hadfield Partner Partner Sydney Sydney 21 August 2019 21 August 2019 PricewaterhouseCoopers SJ Hadfield Partner SJ Hadfield Partner NR McConnell Partner NR McConnell Partner Sydney 21 August 2019 Sydney 21 August 2019 182 i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r 183 Year ended 30 June 2019Stockland Annual Report 2019IntroductionStrategy and performanceBusiness risks and materialityClimate-related risksA better way to deliver shared valueGovernance and remunerationFinancial reportIndependent auditor’s reportGlossary Securityholder information and key dates Securityholders As at 31 July 2019, there were 2,384,351,503 Securities on issue and the top 20 securityholders as at 31 July 2019 is as set out in the table below. In September 2018, Stockland announced an intention to buy-back up to $350 million of Securities over 24 months. As at 31 July 2019, a total of 50,117,773 Securities have been bought-back on-market and cancelled since the commencement of the on-market buy-back programme Securityholders HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty LtdBNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited-GSCO ECA HSBC Custody Nominees (Australia) Limited AMP Life Limited Australian Executor Trustees Limited HSBC Custody Nominees (Australia) Limited E G Holdings Pty Limited Netwealth Investments Limited National Nominees Limited Navigator Australia Ltd CPU Share Plans Pty Ltd Buttonwood Nominees Pty Ltd Argo Investments Limited Milton Corporation Limited Number of securities held Percentage (%) of total securities 892,151,668 486,342,843 284,317,933 141,107,050 75,359,000 29,999,046 26,228,612 13,016,067 10,961,273 10,727,653 8,588,593 7,036,594 6,411,632 5,436,638 5,160,271 4,634,367 4,592,913 4,330,850 4,017,934 3,844,940 37.42 20.40 11.92 5.92 3.16 1.26 1.10 0.55 0.46 0.45 0.36 0.30 0.27 0.23 0.22 0.19 0.19 0.18 0.17 0.16 Distribution of securityholders as at 31 July 2019 Number of securityholder Number of securities Percentage (%) of total securityholders 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – over 12,275 23,161 9,740 7,151 187 5,510,355 63,368,001 70,580,121 148,960,104 2,095,932,922 0.23 2.66 2.96 6.25 87.90 There were 1,737 securityholders holding less than a marketable parcel (110) at close of trading on 31 July 2019. Substantial securityholders as at 31 July 2019 Vanguard Investments Australia Limited/Vanguard Group Inc. BlackRock Group (BlackRock Inc. and subsidiaries) State Street Corporate and subsidiaries ATTRIBUTION MANAGED INVESTMENT TRUST MEMBER ANNUAL STATEMENT After the announcement of the Group’s full year results each year, you will receive a comprehensive attribution managed investment trust member annual statement. This statement summarises the distributions and dividends paid to you during the year, and includes information required to complete your tax return. ANNUAL REPORT Securityholders have a choice of whether they receive: • An electronic version of the Annual Report • A printed copy of the Annual Report REGISTRY Computershare Investor Services Pty Limited operates a freecall number on behalf of Stockland. Contact Computershare on 1800 804 985 for: • Change of address details • Request to receive communications online • Request to have payments made directly to a bank account • Provision of tax file numbers • General queries about your securityholding. DIVIDEND/DISTRIBUTION PERIODS 1 July – 31 December 1 January – 30 June Number of Securities held 244,010,845 209,276,672 136,943,104 KEY DATES 21 OCTOBER 2019 Annual General Meeting The Westin Sydney, 1 Martin Place, Sydney, NSW 2000 at 2.30pm 31 DECEMBER 2019 Record date 19 FEBRUARY 2020 Half-year results announcement 30 JUNE 2020 Record date 25 AUGUST 2020 Full-year results announcement HEAD OFFICE Level 25, 133 Castlereagh Street Sydney NSW 2000 Toll free: Telephone: (61 2) 9035 2000 1800 251 813 STOCKLAND ENTITIES Stockland Corporation Limited ACN 000 181 733 Stockland Trust Management Limited ACN 001 900 741 AFSL 241190 As responsible entity for Stockland Trust ARSN 092 897 348 CUSTODIAN The Trust Company Limited ACN 004 027 749 Level 13, 123 Pitt Street Sydney NSW 2000 I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 184 185 Stockland Annual Report 2019Year ended 30 June 2019 DIRECTORS NON-EXECUTIVE Tom Pockett – Chairman Melinda Conrad Carolyn Hewson Barry Neil Stephen Newton Christine O’Reilly Carol Schwartz Andrew Stevens EXECUTIVE Mark Steinert – Managing Director COMPANY SECRETARY Katherine Grace SHARE/UNIT REGISTRY Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 1800 804 985 Freecall: Telephone: (61 3) 9415 4000 Email: stockland@computershare.com.au AUDITOR PricewaterhouseCoopers YOUR SECURITYHOLDING If you would like to update your personal details or change the way you receive communications from Stockland, please contact Computershare on the detail provided. Computershare will also be able to provide you with information on your holding. FURTHER INFORMATION For more information about Stockland, including the latest financial information, announcements, property news and corporate governance information, visit our website at www.stockland.com.au 1 Carolyn Hewson retired on 24 October 2018. 2 Christine O’Reilly was appointed on 23 August 2018. 186 Glossary AA1000 AA1000 AccountAbility Principles AASBs or Accounting Standards Australian Accounting Standards as issued by the Australian Accounting Standards Board AFFO A-REIT ASIC Adjusted funds from operations Australian Real Estate Investment Trust Australian Securities and Investments Commission Aspire villages Non-DMF product and a purpose- built neighbourhood exclusively for people aged over 55 years ASX CCIRS CDP DJSI D-Life DCF DMF DRP DSTI EBIT EPS Australian Securities Exchange Cross currency interest rate swaps Carbon Disclosure Project Dow Jones Sustainability Index Project development lifecycle Discounted cash flow Deferred management fees earned from residents within the Retirement Living business Dividend/distribution reinvestment plan Deferred short term incentives Earnings before interest and tax Earnings per security Executive Committee Comprise the Executive Director and the Executive team of Stockland Executive Director Mark Steinert, the Managing Director and Chief Executive Officer of Stockland FFO GRESB GRI GST IFRS IPCC IRR KMP KPI LBG LTI MAT NGERs NRV RAP Report ROA ROE SCPL SDGs SDRT No. 1 Security Funds from operations Global Real Estate Sustainability Benchmark Global Reporting Initiative Goods and services tax International Financial Reporting Standards as issued by the International Financial Reporting Standards Board Intergovernmental Panel on Climate Change Internal rate of return Key management personnel Key performance indicators London Benchmarking Group Long term incentives Moving annual turnover National Greenhouse and Energy Reporting Net realisable value Reconciliation Action Plan This Stockland Annual Report 2019 Return on assets Return on equity Stockland Capital Partners Limited Sustainable Development Goals Stockland Direct Retail Trust No. 1 An ordinary stapled security in Stockland, comprising of one share in Stockland Corporation and one unit in Stockland Trust I n t r o d u c t i o n p e r f o r m a n c e S t r a t e g y a n d B u s i n e s s r i s k s a n d m a t e r i a l i t y r i s k s C l i m a t e - r e l a t e d s h a r e d v a l u e t o d e l i v e r A b e t t e r w a y r e m u n e r a t i o n G o v e r n a n c e a n d r e p o r t F i n a n c i a l r e p o r t a u d i t o r ’ s I n d e p e n d e n t i n f o r m a t i o n a n d k e y d a t e s S e c u r i t y h o l d e r G l o s s a r y 187 Stockland Annual Report 2019Year ended 30 June 2019 Security plans Statutory profit STI STML Employee security plans which comprise the LTI, DSTI and $1,000 employee plans Profit as defined by Accounting Standards Short term incentives Stockland Trust Management Limited (ACN 001 900 741, AFSL 241190), the Responsible Entity of Stockland Trust Stockland or Group The consolidation of Stockland Corporation Group and Stockland Trust Group Stockland Corporation or Company Stockland Corporation Limited (ACN 000 181 733) Stockland Corporation Group Stockland Corporation and its controlled entities Stockland Trust Stockland Trust (ARSN 092 897 348) Stockland Trust Group or Trust Stockland Trust and its controlled entities TCFD TSR WALE Task Force on Climate-related Financial Disclosure Total securityholder return Weighted average lease expiry 4 Stockland Annual Report 2019 S t o c k l a n d A n n u a l R e p o r t 2 0 1 9 Stockland Corporation Ltd ACN 000 181 733 Stockland Trust Management Limited ACN 001 900 741; AFSL 241190 As responsible entity for Stockland Trust ARSN 092 897 348 Head Office Level 25, 133 Castlereagh Street Sydney NSW 2000 Sydney T 02 9035 2000 Melbourne T 03 9095 5000 Brisbane T 07 3305 8600 Perth T 08 6141 8000 stockland.com.au