STOCKLAND — Management Reports 2009

Dec 1, 2009

Retirement Living Accounting Workshop David Pitman, CEO Retirement Living & Head of Group Strategy Tania Betts, National Finance Manager, Retirement Living

==> picture [10 x 9] intentionally omitted <==

Agenda

1. Scope of the workshop

2. Recap of Retirement Living business model

3. Accounting lifecycle of Retirement Living assets

4. Step through the accounting for each lifecycle phase using an illustrative example

5. Summary of profit and balance sheet positions across the full lifecycle

6. Wrap up of key messages

==> picture [10 x 9] intentionally omitted <==

Scope of the workshop

► Overview of the accounting entries throughout the four phases of a unit’s development and occupation

► Summarise the profit and loss, balance sheet and cashflow positions during each phase, including a reconciliation back to the disclosure in the Stockland Financial Report

==> picture [10 x 9] intentionally omitted <==

Recap - Retirement Living combines two basic property businesses

Residential development

==> picture [114 x 113] intentionally omitted <==

+

==> picture [114 x 101] intentionally omitted <==

• Acquire land, re-zone, masterplan a community, build a village

• Development profit

• Sales revenue less costs of land, development and construction

• Lower percentage margin than pure residential due to community

  • facilities

Asset management

• Manage a portfolio of tenanted assets; keep residents satisfied

• Replace outgoing residents efficiently

• Refurbish periodically to maintain economic value

• Deferred Management Fees (DMFs)

==> picture [10 x 9] intentionally omitted <==

Recap - Established villages deliver an attractive yield through the DMF

How The DMF Works: Example of a Single Unit Over One Ownership Cycle[(1)]

==> picture [542 x 195] intentionally omitted <==

----- Start of picture text -----

$541k
• DMF received
eg: +3.7%pa
• Typically 3%pa on Exit Price up
$176k to a maximum of 30% + 2.5%
Capital Gain admin fee [(1) ]
$350k $15k • Resident receives
• Original capital
$350k • Resident receives
“Sale” Year Year Year
Price 1 2 12
----- End of picture text -----

• DMFs are the primary income source for established villages

• At critical mass, the stream of DMFs is analogous to rent

• Can therefore express this income in terms of yield[(2)]

==> picture [10 x 9] intentionally omitted <==

Lifecycle of Retirement Living assets - an accounting perspective

1. Development 2. First lease 3. DMF revaluation 4. Turnover • Period during • Point at which a • Period during which DMF accrues, • Point at which DMF which we acquire resident first analogous to rental income is collected and land, re-zone, occupies the unit, accounting starts • Progressive accumulation of capital gains master plan and which triggers again from Step 3 during period of occupancy build village development profit • Outgoing resident and the creation of • During this period, the resident pays pays for ‘make both a DMF asset monthly levies to the village association to good’ refurbishment and a Resident cover village management, maintenance, Loan activities and common area utilities[(1)]

==> picture [652 x 95] intentionally omitted <==

==> picture [10 x 9] intentionally omitted <==

This Lifecycle maps directly to our financial result disclosure

Recap: Stockland Retirement Living Financial Results FY09

==> picture [681 x 345] intentionally omitted <==

----- Start of picture text -----

“Cash” Events “Non-cash” Events
1 2
3
4
43
19 4
33
51 1 2
(1) 2
22 22
28
(1)
22
6
10
4
Initial Cost of Dev. DMF Receipts O/heads Net DMF DMF Total
"Sales" "Sales" Margin Trans. Creation Reval. Income
----- End of picture text -----

==> picture [10 x 9] intentionally omitted <==

Phase 1 - Development period

• Captures all costs associated with village development 1. Development • Equivalent to development of Residential Inventory

	Assumptions	Accounting Entry	P&L	BS	Cash
				Dr/(Cr)
	Land and development costs total	Property, Plant & Equipment(1)		285
	$285k, including:
	• Land	Cash			(285)
	• Development
	• Construction
	• Interest
	• Holding costs
			-	285	(285)

==> picture [10 x 9] intentionally omitted <==

Phase 2 - First Leasing – Development Profit Recognised

• Point at which development profit is recognised

2. First lease

• Recognised at point resident takes occupation of unit

• A recent change to AASB 140 Investment Property will affect both the timing of development profit recognition and classification of villages under construction from 31 Dec 2009 onwards. The impact of the change is currently being assessed and will be announced at 1H10 results

	Assumptions			Accounting Entry	P&L	BS	Cash
						Dr/(Cr)
	Unit leased to first resident			Cash (received from incoming resident)			350
	“Sale” price	$350k		Property, Plant & Equipment(1)		(285)
	“Cost of Sale”	$285k		Revaluation of investment property	(65)
	Development margin		$65k	(development profit on completion)
	Margin %	18.6%
				Investment Property (Capital value)		350
				Existing resident loan obligation (Incoming)		(350)
				(Balance sheet “gross up” required under
				accounting standards and excluded for gearing calculations)	(65)	(285)	350

==> picture [10 x 9] intentionally omitted <==

Phase 2 - First Leasing – DMF First recognised

• Point at which PV of DMF into perpetuity is first recognised

• 2. First lease • Recognised when resident takes occupation of unit

Assumptions	Accounting Entry	P&L	BS	Cash
		Dr/(Cr)
DMF into perpetuity recognised on new unit based on following valuation assumptions: Growth rate 3.7%pa Discount rate 12.55% Turnover rate 12 yrs DMF % 32.5%(1) NPV of DMF $70k Refer Appendix for calculation	Investment Property (Fair Value of DMF asset) Revaluation of investment property (Fair Value movement of DMF contracts) – Profit on creation of DMF	(70)	70

==> picture [10 x 9] intentionally omitted <==

Phase 3 - DMF Revaluation

• DMF “earned” by Stockland during resident occupancy period

3. DMF revaluation

• DMF valued as a portfolio using discounted cashflows

• DMF value is periodically adjusted for the following events:

• the passage of time, moving closer to turnover (+ve impact)

• changes to list prices (+ve or –ve impact)

• changes to valuation assumptions (+ve or –ve impact)

• Increase in the value of Investment Property (Capital value) and Existing Resident Loan Obligation (balance sheet “gross up”) flow through the P&L but are shown below the line and not in Underlying Profit

The next slide provides example accounting entries during the occupancy period at the individual unit level

• In practice, however, a portfolio valuation approach is applied which takes into

==> picture [10 x 9] intentionally omitted <==

Phase 3 - DMF Revaluation

	Assumptions		Accounting Entry	P&L	BS	Cash
					Dr/(Cr)
	Unit value increases by 3.7% pa for		Investment Property (Fair Value of DMF asset)		37
	12 years
	Value after 12 years Initial Value	$541k $350k	Revaluation of investment property (Fair Value movement of DMF contracts)	(37)
	Capital gain	$191k
			The following entries are the adjustment to the
	DMF progressively revalued over the 12 years using same valuation		balance sheet “gross up”:
	assumptions to reach the NPV at the end of year 12		Investment Property (Capital value)		191
	Growth rate	3.7%pa	Revaluation of Investment Property (Capital	(191)
	Discount rate	12.55%	growth)
	Turnover rate	12 yrs
	DMF %	32.5%(1)	Fair Value movement of existing resident loan	191
	NPV of DMF Yr12	$107k	obligation
	NPV of DMF Yr0	$70k	Existing resident loan obligation		(191)
	DMF increase	$37k
	Refer Appendix for cal	culation		(37)	37	-

==> picture [10 x 9] intentionally omitted <==

Phase 4 - First and Subsequent Turnovers

• Point at which DMF is collected from outgoing resident

• Loan arrangement with outgoing resident paid out and new loan 4. Turnover arrangement entered into with incoming resident

• Income received by Stockland is secure given Stockland sets pricing, and is the agent for the ‘re-sale’

	Assumptions	Accounting Entry	P&L	BS	Cash
				Dr/(Cr)
	Resident exits unit at end of 12	Existing resident loan obligation (outgoing)		541
	years and is entitled to original loan
	plus capital gain, being $541k	Cash (to outgoing resident)			(541)
	($350k @ 3.7%pa, 12 yrs)
		Revaluation of Investment Property (Fair Value	(176)
	Stockland collects DMF at 32.5% of exit value, being $176k (10 yrs	movement of DMF contracts)
	@ 3%pa DMF + 2.5% admin fee)	Cash (DMF deducted from proceeds of ‘re-sale’)			176
	Net payment to outgoing resident
	therefore comes to $365k ($541k -
	$176k)	Cash (from incoming resident)			541
	New resident moves in at list price of $541k	Existing resident loan obligation (incoming)	(176)	(541) -	176

==> picture [10 x 9] intentionally omitted <==

Phase 4 – Make good and refurbishment costs

Make Good

• As part of the resident agreement, each resident is required to ‘Make Good’ on their unit upon exit

• Make Good covers items such as carpet, curtains and any other damage

• These costs are deducted from the final payment made to the outgoing resident

Refurbishment

• In order to maintain individual unit values and the overall village standard, Stockland performs

• refurbishment of units as required

• Refurbishment typically includes items such as new kitchen and bathroom

• The refurbishment sustains and/or increases unit values which maintains/increases DMF returns

• Refurbishment costs are factored into the DMF valuation model assumptions and are therefore

==> picture [10 x 9] intentionally omitted <==

Cash moves closer to accounting profit over time

• As mentioned in Phase 3, the DMF is valued at a portfolio level using discounted cash flows

• Movements in the DMF value are recognised through the profit and loss statement and represent movements in relation to both the existing resident and future resident cashflows

• The cumulative cashflows over time move closer to the cumulative profits recognised as shown in the graph below but does not reach it due to the impact of the present value of future turnovers

==> picture [41 x 164] intentionally omitted <==

----- Start of picture text -----

$m 12
10
8
6
4
2
----- End of picture text -----

Single Village Example: Projected Cumulative Profit vs. Cash

Assumptions:

• This graph is modeled assuming a new village reaching turnover maturity after twelve years

• 100 unit village with avg initial lease values of $320k/unit

• DMF accrues at 3%pa up to max of 30% at 10 yrs; 2.5% admin fee

• Valuation assumptions used are assumed growth rate of 3.7% and discount rate of 12.55%

==> picture [10 x 9] intentionally omitted <==

Summary Profit Position - Phases 1 to 4

The following table summarises the underlying profit and statutory result during the four phases shown:

Profit & Loss Statement	Phase 1 Development	Phase 2 First lease	Phase 3(1) DMF Reval.	Phase 4 Turnover	Total
	Dr/(Cr)
Revaluation of Investment Property (development profit on completion) Revaluation of Investment Property (FV movement of DMF contracts)	- -	(65) (70)	- (37)	- (176)	(65) (283)
Underlying profit Revaluation of Investment Property (Capital growth) Fair Value movement of existing resident loan obligation	- - -	(135) - -	(37) (191) 191	(176) - -	(348) (191) 191
Statutory profit	-	(135)	(37)	(176)	(348)

• All profit movements associated with initial development and DMF are recognised as part of Underlying Profit

==> picture [10 x 9] intentionally omitted <==

Summary Balance Sheet Position – Phases 1 to 4

The following table summarises the balance sheet position at the end of each of the four phases shown:

Balance Sheet	Phase 1 Development	Phase 2 First lease	Phase 3 DMF reval.	Phase 4 Turnover
	Dr/(Cr)
	(285) 285 - -	65 - 70 350	65 - 107 541	241 - 107 541
	-	485	713	889
	-	(350)	(541)	(541)
	-	(350)	(541)	(541)

==> picture [10 x 9] intentionally omitted <==

Recap – Stockland Retirement Living financial position at Jun-09

Extract from Note 44 Stockland Annual Financial Report 2009

==> picture [147 x 35] intentionally omitted <==

----- Start of picture text -----

• Net Present Value of the future
stream of DMFs (i.e. the value
of the financial asset)
----- End of picture text -----

==> picture [4 x 26] intentionally omitted <==

==> picture [5 x 29] intentionally omitted <==

==> picture [14 x 199] intentionally omitted <==

==> picture [14 x 209] intentionally omitted <==

==> picture [466 x 174] intentionally omitted <==

==> picture [7 x 84] intentionally omitted <==

• Underlying value of the physical property

• • Asset side of balance sheet “gross up”

• • From 31 Dec 2009 onwards, villages under construction will be included as part of this balance

==> picture [11 x 142] intentionally omitted <==

==> picture [8 x 84] intentionally omitted <==

==> picture [4 x 31] intentionally omitted <==

==> picture [5 x 26] intentionally omitted <==

• Value of resident loans to Stockland

• Liability side of balance sheet “gross up”

• Difference to asset “gross up” relates to

==> picture [470 x 35] intentionally omitted <==

----- Start of picture text -----

value of unoccupied units
----- End of picture text -----

==> picture [10 x 9] intentionally omitted <==

Recap – Stockland Retirement Living financial position at Jun-09

Extract from Note 44 Stockland Annual Financial Report 2009

==> picture [4 x 26] intentionally omitted <==

==> picture [5 x 35] intentionally omitted <==

==> picture [18 x 256] intentionally omitted <==

==> picture [17 x 263] intentionally omitted <==

==> picture [485 x 45] intentionally omitted <==

==> picture [9 x 106] intentionally omitted <==

==> picture [463 x 196] intentionally omitted <==

==> picture [9 x 106] intentionally omitted <==

==> picture [4 x 24] intentionally omitted <==

==> picture [4 x 24] intentionally omitted <==

==> picture [5 x 46] intentionally omitted <==

==> picture [5 x 37] intentionally omitted <==

• Increase in the value of the Investment Property (Capital value) balance sheet “gross up”

Comprises:

• DMF creation $6m

• DMF revaluation $33m

• DMF receipts $10m[(1)]

Comprises:

• Development margin $10m

• Conversion profit $12m[(1)]

==> picture [470 x 35] intentionally omitted <==

• Increase in the value of the Existing Resident Loan

==> picture [10 x 9] intentionally omitted <==

Wrap up of key messages

► Retirement Living is both a recurring and trading style business model producing two sources of income, which fits well with Stockland’s overall portfolio strategy

• The trading element is development profit recognised on first leasing (Phase 2)

• Profit and cashflow are closely matched at this stage, and could be equal depending on timing of construction

• The recurring element has two parts: initial DMF creation (Phase 2) and DMF revaluation (Phase3)

• The DMF cash collected from outgoing residents in Phase 4 approaches the progressive adjustment to the DMF value over time

• Cash approaches accounting profit over time

==> picture [10 x 9] intentionally omitted <==

Appendix

==> picture [10 x 9] intentionally omitted <==

DMF NPV calculations

Backup: Detailed NPV Backup: Detailed NPV Calculation for the DMFCalculation for the DMF

Phase 2 – First Leasing – DMF First recognised (NPV calculated at date resident occupies unit)

	Year		0		12			24		36		Terminal
												value
	Unit price increased by 3.7% p.a.		350		541			837		1,295
	DMF at 32.5%				176			272		421		396
	PV at 12.55%				43			16		6		5
	Total DMF NPV		70
Calculation of Terminal Value:
• Step 1 - Annualise the DMF by taking $421 DMF in Year 36 and divide by 12 years, given 12 year								assumed occupancy period (=$35)
• Step 2 - Calculate the value of the growing perpetuity based on this annualised figure:				$35/(12.55%-3.7%) = $396
	se 3 – DMF Revaluation (NPV calculated at date first resident exits unit being							12 years)
	Year		0		12			24		36		Terminal
												Value
	Unit price increased by 3.7% p.a.		541		837			1,295		2,002
	DMF at 32.5%				272			421		651		613
	PV at 12.55%				66			25		9		7
	Total DMF NPV		107

Phase 3 – DMF Revaluation (NPV calculated at date first resident exits unit being 12 years)

==> picture [10 x 9] intentionally omitted <==

Stockland Corporation Limited ACN 000 181 733

Stockland Trust Management Limited ACN 001 900 741

25th Floor 133 Castlereagh Street SYDNEY NSW 2000

DISCLAIMER OF LIABILITY

While every effort is made to provide accurate and complete information, Stockland does not warrant or represent that the information in this presentation is free from errors or omissions or is suitable for your intended use. The information provided in this presentation may not be suitable for your specific situation or needs and should not be relied upon by you in substitution of you obtaining independent