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DEVELOPMENT CORPORATION

We Build to Serve for a Brighter Tomorrow

2012
ANNUAL REPORT

We Build to Serve for a Brighter Tomorrow


For more than fifty years, SM stood strong amidst the highs and lows of the Philippine economy, successfully branching out from a small shoe store into a wide range of services. Its real estate developing arm, SM Development Corporation has emerged as a formidable player in the industry as it continues to build homes that offer a personal and unique experience and creates value by offering a better and much more convenient lifestyle at affordable prices. With the Philippines now on a wave of sustained economic growth, SMDC will further expand its product offerings to continue to uplift the lives of Filipinos. At SMDC, we build to serve for a brighter tomorrow.

CHATEAU ELYSEE
Paraaque City

MEZZA RESIDENCES
Quezon City

2003

2006

GRASS RESIDENCES
Quezon City

SEA RESIDENCES
Pasay City

2008 BERKELEY RESIDENCES


Quezon City

2008 FIELD RESIDENCES


Paraaque City

LIGHT RESIDENCES
Mandaluyong City

2009 PRINCETON RESIDENCES


Quezon City

2008

2008

2009

SUN RESIDENCES
Quezon City

2009

WIND RESIDENCES
Tagaytay City

BLUE RESIDENCES
Quezon City

SHELL RESIDENCES
Pasay City

2009 JAZZ RESIDENCES


Makati City

2011

2011

BREEZE RESIDENCES
Pasay City

2009 GREEN RESIDENCES


Manila

2012 ROSE RESIDENCES


Pasig City

GRACE RESIDENCES
Taguig City

2011

2011

2012

DEVELOPMENT CORPORATION

Our Vision
We envision SM Development Corporation to be a leading developer of world-class residences in the Philippines, uplifting Filipino lifestyles into one that is convenient, upscale yet affordable, and environment-friendly.

Our Mission
SM Development Corporation will realize its vision by:

Ensuring that its homebuyers enjoy the best value for their investment with an upscale lifestyle, best location, generous amenities, and a safe, secure, and friendly neighborhood yet affordable; Providing an excellent after-sales and maintenance service that will preserve and enhance the long-term value of its residences; Delivering sustainable long-term growth and increasing shareholder value by exercising prudence in resource management based

on the principles of good corporate governance and good planning; Becoming an employer of choice, offering comprehensive opportunities for career growth and enhancement, performance reward and incentives; and, Assisting and nurturing the communities in which it operates by progressively building on its role as a responsible corporate citizen.

Core Values
V I S I O N L E A D E R S H I P I N N O V AT I O N F O C U S H A R D W O R K I N T E G R I T Y P R U D E N C E

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

04 Chairmans Message

06 Chief Executive Officers Report


08 Year in Review

TABLE OF CONTENTS

10 2013 New Projects


12 Corporate Social Responsibility


08
Banking

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

10

15
13 FACES - Board of Directors

15 Executive Officers

16 Corporate Governance

20 Corporate Information

21 Financial Statements

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

MESSAGE TO STOCKHOLDERS

IN 2012, SM DEVELOPMENT CORPORATION REPORTED EXCELLENT GROWTH IN SALES AND INCOME WHICH REINFORCED ITS POSITION AS A MAJOR PLAYER IN THE INDUSTRY.
Given the markets keen interest amid a booming economy, SMDC saw real estate revenues surge 33% in the past year to Php21.6 billion, which helped push net income higher by 18% to Php4.9 billion. Our residential projects continued to enjoy brisk take-up with the value of pre-sold units growing by 21% to Php31.7 billion. By the end of 2012, SMDC had 15 ongoing residential projects in Quezon City, Paranaque, Manila, Makati, Pasay, Pasig, Taguig in the Metro Manila area and one in Tagaytay City. In 2013, SMDC plans to launch new and expand existing projects to meet rising demand in Metro Manila. We have been increasing our capital expenditure budget to support the needs of a growing market and to broaden our land bank further. With a strong economy that equalizes the market, we are constantly striving to position ourselves at the forefront of the markets everevolving needs. SMDC will continue to focus on the premium mid-range market due to its size and inherent strength while remaining on the lookout for significant trends in other market niches. We will continue to innovate on designs and concepts in our projects as we constantly aim to fulfill aspirations, improve lifestyles and promote environmental sustainability. Finally, I would like to thank our SMDC team for the companys remarkable growth and for the support of the members of the Board and senior management. I also express my thanks to our contractors, consultants, our investors and creditors who continue to help SMDC achieve and exceed its targets. Most of all, I would like to thank our residents for their confidence in SMDC. We build to serve you.

HENRY SY, SR.


Chairman Chairman

HENRY SY, JR. HENRY SY, SR.


Vice Chairman

Vice Chairperson

TERESITA SY-COSON

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

CHIEF EXECUTIVE OFFICERS REPORT

I AM VERY PLEASED TO REPORT THAT 2012 WAS ANOTHER LANDMARK YEAR FOR SM DEVELOPMENT CORPORATION.
Not only did it deliver strong results but it also maintained its dominant position in the Philippine residential development business after it ranked as the top selling residential condominium developer in Metro Manila with a market share of 23% according to Colliers International Philippines. Our financial performance continued to be robust after we posted consolidated net income growth of 18% to Php4.9 billion. Revenues from real estate sales rose sharply 33% to Php21.6 billion, from Php16.2 billion in the previous year. Earnings before interest, taxes, depreciation and amortization amounted to Php5.6 billion. These numbers reaffirm our belief that the Philippines has a huge underserved residential market that aspires for affordable homes, a better lifestyle, and the conveniences of strategically-located residences. Notably, SMDCs asset base expanded 49% to Php80.2 billion. As of December 2012, net debt to equity ratio remained conservative at a ratio of 29% net debt to 71% equity as we again adopted prudence to guard the company against cyclical risks inherent to the real estate business. Beyond prudence, and a good business model, SMDCs projects enjoyed the markets strong support as the number of units sold during the year increased 8% to 12,614 units from 11,726 units in 2011. Pre-sales increased 21% to Php31.7 billion in 2012, from Php26.3 billion in the previous year, which exceeded our targets. The sustained strong interest of numerous home buyers in SMDCs various residential condominium projects was matched by a fresh supply of attractive projects. We are firmly committed to address the needs and aspirations of a market that is likely to grow even further with the improvement in the economy marked by growing OFW remittances and improved consumer and investor confidence. Most of the units sold during the year were from Shell Residences in the Mall of Asia Complex, Green Residences along Taft Avenue, Jazz Residences in Makati, Light Residences along EDSA, Sun Residences in Quezon City, Grass Residences, also in Quezon City, and Wind Residences in Tagaytay City. By the end of the year, SMDC had 15 ongoing residential condominium projects all over Metro Manila, with the exception of Wind Residences in Tagaytay. We also launched in 2012 Grace Residences in Taguig, our newest suburban sanctuary which consists of four towers and is strategically located near three of the countrys lifestyle and business districts. Your company also launched Breeze Residences in Pasay City, which is a 38-storey development that is very near the SM Mall of Asia, and the Cultural Center of the Philippines. We have also expanded Jazz Residences in Makati, Wind Residences, and M Place @ South Triangle in Quezon City. These projects added over 6,878 units to our sales inventory. With these new and expansion projects, SMDC aims to strengthen its position in the premium mid-range market and reaffirm its commitment to provide Filipino home buyers with strategically located, high-quality but affordable homes. For 2013, we plan to launch four new projects and expand three existing developments in Metro Manila. The current economic expansion that can lead to higher savings and disposable incomes and a greater need for a better quality of life should continue to underpin demand for projects in prime locations. Moving forward, we will endeavor to build more homes that will provide comfort and a balanced environment for our communities. As we remain optimistic on our growth prospects for 2013, we thank you our shareholders, investors, contractors, employees and most of all our residents for your support.

2012 in Php Billion


90 80 70 60 50 40 30 20 10 0Total Assets 80.20 Total Liabilities 40.06 Stockholders Equity 40.14

2011 in Php Billion


90 80 70 60 50 40 30 20 10 0Total Assets 53.92 Total Liabilities 18.52 Stockholders Equity 35.41

2012 in Php Billion


25 20 15 10 50Revenues from Real Estate 21.58 Consolidated Net Income 4.90 EBITDA 5.62

2011 in Php Billion


25 20 15 10 50Revenues from Real Estate 16.18 Consolidated Net Income 4.18 EBITDA 4.91

HENRY T. SY, JR.

Vice Chairman and Chief Executive Officer

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

Year in Review

GEMA O. CHENG
Chief Finance Officer

JOSE T. GABIONZA
Vice President Business Development

Vice President, Sales

EFREN L. TAN

HENRY T. SY, JR.

Vice Chairman and Chief Executive Officer

We are gratified by the markets confidence in our projects this year. This is a testament to the continuing resonance in the market of SMDCs value proposition of offering homes that are not only strategically located and of highquality, but are also affordable which according to a Colliers International Philippines survey represents the largest market share in Metro Manila at 23% as of end-2012.

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

SM Development Corporation (SMDC) continued to dominate the residential condominium market in 2012. Homebuyers warmly received the companys offerings as reflected by the strong takeup of SMDCs projects. Pre-sales for 2012 rose 21% to Php31.7 billion from Php26.3 billion in the previous year. We are gratified by the markets confidence in our projects this year. This is a testament to the continuing resonance in the market of SMDCs value proposition of offering homes that are not only strategically located and of high-quality, but are also affordable which according to a Colliers International Philippines survey represents the largest market share in Metro Manila at 23% as of end-2012. As proof of the markets support, the number of units sold during the year increased 8% to 12,614 units from 11,726 units in 2011. By the end of the year, SMDC had 15 ongoing residential condominium projects in Metro Manila including one project in Tagaytay. New offerings in Taguig and Pasay were also launched in the latter part of 2012. Construction remained on track for 2012 given the rate of completions for each project. We are also keenly aware of the value propositions of locations we offer for each development. SMDC developed Blue Residences at the corner of Katipunan Avenue and Aurora Boulevard. The single-tower project, which sits right beside Ateneo de Manila University and Miriam College, spans 57,013 square meters (sqm) in gross floor area (GFA) and was 68% completed at year-end. Take-up of Blue Residences has been strong, with 76% or 1,217 units sold. Behind SM City North EDSA is Grass Residences with a GFA of 205,335 sqm. Of the projects three towers, Tower 1 had been completed, while Towers 2 and 3 were partially completed at 64% and 98%, respectively, as of year-end. Take-up had been very strong with 97% of the projects total 5,997 units sold. Light Residences is centrally located in EDSA-Mandaluyong and directly linked to the Metro Rail Transit station. With a GFA of 148,281 sqm, its Tower 1 was 92% complete, while Towers 2 and 3 were at 56% and 73% completion, respectively. Light enjoyed healthy market appetite with 91% of total 4,227 units sold. After the success of our very first high rise residential condominium development Mezza Residences, comes Mezza II Residences, located along Aurora Boulevard. Mezza II Residences soars 40 storeys high providing a sweeping view of Metro Manila. A single-tower structure with a GFA of 49,038 sqm, Mezza II was at 37% completion at the end of year. Mezza II also enjoyed brisk take-up with 53% of its 1,324 units sold. In addition to these projects, which are under the SM Residences brand, SMDCs M Place brand caters to a younger market and offers even greater affordability. M Place @ South Triangle, its latest offering, has a gross floor area of 108,731 sqm, and consists of four towers. As of year-end, Towers 1, 2, 3, and 4 were at 91%, 84%, 48%, and 37% completion, respectively. M Place @ South Triangle has sold 2,289 or 67% of the 3,437 units that were launched for sale.

In Manila, we built Sun Residences, which is situated at the gateway of Manila and Quezon City with a GFA of 139,243 sqm. Its Towers 1 and 2 were at 91% and 75% completion at the end of the year. Out of its 4,039 units launched for sale, 3,132 or 78% had been sold. Green Residences, with a GFA of 102,468 sqm, is located along Taft Avenue conveniently beside De La Salle University Manila. Started in late 2011, the project was 18% completed as of yearend. As of the end of the year, it has sold 2,700 units or 80% of its 3,378 total. Sea Residences, on the other hand, is a modern tropical-inspired mid-rise condominium located right at the heart of the Mall of Asia Complex, with a GFA of 117,299 sqm. The projects buildings were all completed at year-end. Some 95% of the projects total 2,899 units had been sold. Shell Residences, SMDCs second project in the Mall of Asia complex after Sea Residences, has a total GFA of 127,587 sqm and will be composed of four mid-rise buildings. A total of 86% or 2,668 units of the projects 3,093 total units had been sold. SMDC also developed projects utilizing its extensive landbank in Pasig, Makati and Paranaque. Located along Meralco Avenue, in Ortigas Center in Pasig is SMDCs Rose Residences spanning 40,942 sqm in GFA. Construction of the single-tower Rose Residences only commenced late last year but the project has already sold 41% of its 1,172 total units. Jazz Residences, is also very close to the Makati Business District and has a GFA of 208,968 sqm. At year-end, Tower A of the project was 93% complete, while its Towers B, C, and D were at 54%, 72%, and 52% completion, respectively. It has sold 72% or 3,861 units of its 5,367 total. For Field Residences in Paranaque, a total of 1,748 units were sold, representing 89% of the projects 1,974 units launched for sale. On full completion, Field Residences will have ten towers with a total GFA of 162,929 sqm. As of the end of December 2012, Towers 1, 2, 3, and 8 were fully completed, while Tower 7 was 65% complete. SMDCs first foray outside of Metro Manila is through Wind Residences in Tagaytay City, one of the most popular tourist destinations in the Philippines. Wind Residences will have ten towers upon full completion, with a total GFA of 372,201 sqm. As of December 2012, Tower 1 was at 95% completion, while Towers 2 and 3 were 96% and 61% complete. Approximately 86% of the projects 2,874 units had been sold. As the markets appetite for new product offerings remain robust, SMDC will position itself to take advantage of opportunities to uplift the lifestyles of Filipinos and create more value within the communities it serves.

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SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

NEW PROJECTS

A Snapshot of SMDCs New Projects


Taking off from the success of its ongoing projects, SMDC rolled out two new residential condominium projects and expanded three of its existing developments. These projects, like their predecessors, will provide residents with the unique mix of architectural excellence, comfort, convenience, and safety for which SMDC is known for. These projects will offer a total of 6,878 new units for sale. Our vision is to continue to enrich the Filipino lifestyle through our developments. As we remain committed to this vision, we hope the market will continue to welcome our new product offerings. One of the companys newest offerings is Grace Residences. A four-tower, 3,560-unit development, Grace Residences will rise on a 2.6 hectare property along Cayetano Boulevard in Taguig City, strategically located near three of the countrys premier lifestyle and business centers--Bonifacio Global City, the Ortigas Center and the Makati Central Business District. With a gross floor area (GFA) of about 170,000 square meters (sqm), Grace Residences will consist of a 12-storey tower and three 20-storey towers. Residents will enjoy Grace Residences generous amenities, which include a basketball court, swimming pools (adult and kiddie), a jogging path, and a childrens playground among others. Grace Residences will feature gardens providing a relaxing contrast to the hustle and bustle of the surrounding area. Beyond its recreational amenities and landscaped gardens, Grace Residences will offer convenience within its confines--retail establishments, including a SaveMore store, will be housed in one of the towers to service its residents and those of nearby communities. Unit types available are 1-bedroom units with a balcony, with sizes ranging between 27 sqm and 31 sqm. Construction is set to begin in the latter part of 2013 and turnover of the first two towers is slated for 2016. Another exciting offering is Breeze Residences. Breeze Residences is a 38-storey development that will stand on a 6,028 sqm property along Roxas Boulevard, within easy reach of shopping, dining, and entertainment destinations such as the Mall of Asia Complex and Star City. It also provides access to arts and culture hubs such as the Cultural Center of the
Grace Residences Lobby

Philippines and the Museo Pambata; and government offices such as the Senate and the Bangko Sentral ng Pilipinas. With a GFA of approximately 111,000 sqm, Breeze Residences will have 2,134 residential units, consisting of studio and one bedroom units with sizes ranging from 21 sqm to 42 sqm, which are designed to capitalize on magnificent views of both Manila Bay and the Makati cityscape. Masterplanned to suit the needs and lifestyles of single young professionals and starting families, the amenities of Breeze Residences include a grand lobby, adult pools, a kiddie pool, landscaped gardens with gazebos, poolside lounge areas, a childrens playground and a Sky Lounge at the penthouse, where residents can unwind over panoramic views of Manila Bay or the Manila skyline. Shopping for daily essentials will also be convenient as Breeze Residences will have a commercial area complete with a SaveMore store, on its ground floor. Construction is scheduled for mid-2013 while turnover is set for late 2016. In addition to Grace Residences and Breeze Residences, SMDC expanded three of its existing developments, namely, Jazz Residences in Makati, Wind Residences in Tagaytay, and M Place @South Triangle in Quezon City. These expansion projects will provide a total of 3,395 units of new inventory. Jazz Residences 40-storey Tower B will offer 1,749 additional units; the 22-storey Tower 4 at Wind Residences will feature 726 units; and the 27-storey Tower D at M Place @ South Triangle will have 920 units. Except for the expansion tower at Wind Residences, which is expected to be completed in 2016, the two other expansion projects are slated for completion in 2015. With the launch of its new and expansion projects in 2012, SMDC reaffirms its commitment to provide Filipino homebuyers with strategically located, high-quality but affordable homes, both in the near term and for years to come.

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

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Grace Residences Breeze Residences

Grace Residences

Our vision is to continue to enrich the Filipino lifestyle through our developments. As we remain committed to this vision, we hope the market will continue to welcome our new product offerings.

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SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

CORPORATE SOCIAL RESPONSIBILITY

A Note from SM Foundation

SM Foundation remained steadfast in reaching out to more beneficiaries in 2012 through its advocacies in education, health and livelihood. These advocacies continued to show significant progress, backed by the fervent support of SM and its subsidiaries and various donor institutions and individuals.
To support its education advocacy, SM Foundation employed a two-pronged approach-- provide college scholarships to give quality education to the financially-challenged youth and donate school buildings to help address the classroom shortage in the country. Through its scholarship program, SM Foundation was able to produce a significant number of exceptional graduates who received Latin honors and academic distinctions. Many of the graduating scholars who took government board exams have also landed on the top ten. In 2012, there were 1,200 SM Foundation college scholars enrolled in various courses. There were 164 college graduates, with 76 of them earning honors. To date, SM Foundation has helped 1,500 students graduate through its scholarship program which paved the way for employment both here and abroad. Adding to this number were 93 technical-vocational scholars that graduated last year. SM Foundation also donated ten new school buildings in 2012 to public schools in Metro Manila (Navotas City), Cavite, Cagayan de Oro, Quezon, and Pampanga. Combined, these school houses provided 26 new classrooms. Some of these school buildings were donated in partnership with SM Development Corporation, SM Prime Holdings, BDO Foundation and Deutsche Bank. To enhance public health among indigent communities, SM Foundation conducted 85 medical missions in 2012 which surpassed its target for the year. These directly served over 89,000 beneficiaries in 2012. Since the projects beginnings in 2001, total medical missions amounted to 739, reaching a total of 600,203 beneficiaries. SM Foundations Virtual Blood Bank project also garnered the Jose Rizal Award, the highest recognition given to an organization by the Philippine Blood Center (PBC) of the Department of Health (DOH). The Virtual Blood Bank is the first of its kind in the country. The blood collected from employees is banked with the PBC and is available for SM employees and their families. Excess supply was donated to victims of the Dengue outbreak in 2011 and 2012. Under its Felicidad T. Sy Wellness Centers program, SM Foundation has likewise refurbished a total of eight rundown public health centers bringing to 77 the total number of centers that were restored since the start of the project. With regard to training on sources of livelihood, SM Foundation, through the Kabalikat sa Kabuhayan program provides farmers with training on effective ways of producing high yielding fruits and vegetables. Through this undertaking, trainings to farmers in 10 provinces were provided, covering 175 barangays and 42 municipalities. SM, in turn, supports the farmers by providing a market for their produce through the groups retail chains. SM Foundation trained a total of 1,245 farmers bringing the total of farmer beneficiaries to 5,421 since the projects inception. Notably, SM Foundation continued to support community development initiatives in SMs flagship eco-tourism development in Nasugbu, Batangas. Initiatives are geared towards skills training, mangrove planting and livestock raising and dispersal. SM Foundation was also quick to respond to calamity victims through Operation Tulong Express. When the Southwest Monsoon disaster struck in August 2012, SM Foundation distributed kalinga packs that benefitted a total of 54,200 families. In cooperation with SM Cares and SM Food Group and the Department of Social Welfare and Development, we also distributed relief goods to 6,600 families in Compostela, New Bataan, Montevista and Moncayo in the province of Compostela Valley in the aftermath of Typhoon Pablo. In addition, the SM Group of Companies donated Php10 million to the Philippine Red Cross for the rebuilding of some of the 40,000 homes that were destroyed during the typhoon, purchase of food and medicines for the victims and for the provision of a livelihood program. These accomplishments were a result of the hard work and dedication of the team behind SM Foundation. Through resolute partnerships with both the private and public sectors, SM Foundation will continue to carry out its advocacies to serve more communities.

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

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FACES
BOARD OF DIRECTORS
MR. HENRY SY, SR.
Chairman of the Board
Mr. Henry Sy, Sr. is the founder of the SM Group of Companies and the Chairman of SM Investments Corporation, SM Prime Holdings, Inc., SM Land, Inc. (formerly Shoemart, Inc.) and Highlands Prime, Inc. He founded and opened the first Shoemart store in 1958, which has evolved into a dynamic group of companies with five lines of businessesretail, shopping malls, financial services and real estate development, hotels and conventions. Mr. Sy likewise serves as the Chairman Emeritus of BDO Unibank, Inc. and Honorary Chairman of China Banking Corporation.

MR. HENRY T. SY, JR.


Vice Chairman and Chief Executive Officer
Mr. Henry T. Sy, Jr. graduated with a Management degree from De La Salle University. He is responsible for the real estate acquisitions and development activities of SM Land, Inc. and SM Development Corporation which include the identification, evaluation and negotiation for potential site as well as the input of design ideas. He serves as Vice Chairman of SM Investments Corporation, Vice Chairman and President of SM Land, Inc. and Highlands Prime, Inc., and Director of SM Prime Holdings, Inc. and BDO Unibank, Inc. He is also the Chairman of Pico De Loro Beach and Country Club, Inc. and President of the National Grid Corporation of the Philippines.

MS. ELIZABETH T. SY
Director
Ms. Elizabeth T. Sy primarily oversees the SM Groups increasing involvement in the tourism and hospitality industry sector. She serves as Director of SM Development Corporation, SM Land, Inc. and BDO Private Bank. Ms. Sy is also the President of SM Hotels and Conventions Corporation, Adviser to the Board of SM Investments Corporation, Senior Vice President for Marketing of SM Prime Holdings, Inc., Vice President of SM Commercial Properties, Inc. and Co-Chairman of Pico De Loro Beach and Country Club.

MS. LEONORA V. DE JESUS*


Independent Director
Ms. Leonora V. De Jesus graduated from the University of the Philippines Cum Laude with a degree of A.B. Psychology. She has a Master of Arts and a Ph.D. both in Psychology from the University of the Philippines. Ms. De Jesus likewise serves as Independent Director of BDO Leasing and Finance, Inc., BDO Capital and Investment Corporation and BDO Elite Savings Bank, Inc. She is also a Senior Consultant at the Urban and Social Development Philippines and a Professorial Lecturer at the University of the Philippines in Diliman, Quezon City.

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SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

MS. TERESITA SY-COSON


Adviser to the Board
Ms. Teresita Sy-Coson is the Vice Chairperson of SM Investments Corporation. She has varied experiences in retail merchandising, mall development and banking businesses. A graduate of Assumption College, she was actively involved in Shoemarts development. At present, she is the Chairman of the Board of Directors of BDO Unibank, Inc. She also holds board positions in several companies within the SM Group.

MR. JOSE T. SIO

Adviser to the Board


Mr. Jose T. Sio is the Executive Vice President and Chief Finance Officer of SM Investments Corporation. He is also a Director of China Banking Corporation, Belle Corporation, SM Keppel Land, Inc., Manila North Tollways Corporation, and Atlas Consolidated Mining and Development Corporation as well as other companies within the SM Group. Mr. Sio is also Adviser to the Board of Directors of BDO Unibank, Inc. Mr. Sio holds a masters degree in Business Administration from New York University, is a certified public accountant and was formerly a senior partner at Sycip Gorres Velayo & Co. (a member practice of Ernst & Young).

MR. OCTAVIO V. ESPIRITU*


Independent Director
Mr. Octavio V. Espiritu is a three-term former President of the Bankers Association of the Philippines (BAP), former President and Chief Executive Officer of Far East Bank and Trust Company, and former Chairman of the Board of Trustees of Ateneo De Manila University. He is also the Chairman and President of MAROV Holding Company, Inc. and Chairman of Delphi Group, Inc. Mr. Espiritu likewise serves as Independent Director of the Bank of the Philippine Islands, Digital Telecommunications Philippines, Inc., International Container Terminal Services, Inc., Netvoice, Inc. and Pueblo de Oro Golf and Country Club.

ATTY. RICARDO J. ROMULO*


Independent Director
Atty. Ricardo J. Romulo is a Senior Partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles Law Firm. Currently, Atty. Romulo is also a director of Beneficial-PNB Life Assurance Co., Inc., Goulds Pumps (Phils.), Inc., Honda Philippines, Inc., Johnson & Johnson (Phils.), Inc., Kraft Foods (Phils.), Inc., Maersk-Filipinas, Inc., Phil. American Life & General Insurance Co., Planters Development Bank and Zuellig Pharma Corporation. He likewise serves as Director and Chairman of Cebu Air, Inc., Digital Telecommunications, Inc., Federal Phoenix Assurance Co., Inc., Interphil Laboratories, Inc. and Manchester International Holdings Unlimited Corp.

* Independent director the Company has complied with the Guidelines set forth by SRC Rule 38, as amended, regarding the Nomination and Election of Independent Director. The Companys By-Laws incorporate the procedures for the nomination and election of independent director/s in accordance with the requirements of the said Rule.

BOARD COMMITTEES
Audit and Risk Management Committee Octavio V. Espiritu Chairman, Independent Director Henry T. Sy, Jr. Member Atty. Ricardo J. Romulo Member, Independent Director Jose T. Sio Member Atty. Corazon I. Morando Member Luis Y. Benitez Member Nomination Committee Atty. Ricardo J. Romulo Chairman, Independent Director Henry T. Sy, Jr. Leonora V. De Jesus Elizabeth T. Sy Member Member, Independent Director Member Rosaline Y. Qua Octavio V. Espiritu Teresita Sy-Coson Harley T. Sy Member Member, Independent Director Member Member

Compensation and Remuneration Rosaline Y. Qua Chairman Octavio V. Espiritu Member, Independent Director Leonora V. De Jesus Member, Independent Director Executive Committee Henry Sy, Sr. Henry T. Sy, Jr. Chairman Member

Corporate Information Officers Jose T. Gabionza Corporate Information Officer Rosaline Y. Qua Alternate Corporate Information Officer

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

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FACES
EXECUTIVE OFFICERS
GEMA O. CHENG Chief Finance Officer JOSE T. GABIONZA Vice President, Business Development ATTY. EPITACIO B. BORCELIS, JR. Assistant Corporate Secretary HENRY T. SY, JR. Vice Chairman and Chief Executive Officer ATTY. EMMANUEL C. PARAS Corporate Secretary EFREN L. TAN Vice President, Sales

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SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

CORPORATE GOVERNANCE

SM Development Corporation continues to foster its culture of good corporate governance by enhancing its long-standing, governance-related policies and programs and introducing new initiatives based on global best practice.
Policies
SMDCs platform of governance is rooted in its Manual on Corporate Governance and Code of Ethics. To focus on specific issues and concerns, the Company has adopted and implemented several corporate governance policies and programs which support the Manual and Code. SMDC regularly reviews and enhances these policies to keep pace with corporate governance best practice. Manual on Corporate Governance The Manual on Corporate Governance institutionalizes the principles of good corporate governance, defines the Companys compliance system and identifies the responsibilities of the Board of Directors in relation to good corporate governance. It also states the Companys policies on disclosure and transparency, and mandates the conduct of communication and training programs on corporate governance. The Manual further provides for the rights of all shareholders and the protection of the interests of minority stockholders. It likewise sets the penalties for non-compliance with the Manual. There have been no deviations from the Manual since it was adopted. In January 2012, SMDC submitted to the SEC its certification of full compliance with the Manual, confirming that its directors, officers and employees have adopted and fully complied with all leading practices and principles of good corporate governance as provided for in the Manual on Corporate Governance. (To access the full Manual on Corporate Governance, you may visit SMDCs website at www.smdevelopment.com) Code of Ethics The Code of Ethics reaffirms the Companys commitment to the highest standards of ethics and good corporate governance in the pursuit of SMDCs mission and vision to serve the best interests of its stakeholders. The Code also sets Directors, officers and employees who have access to material, confidential and stock price-sensitive information (i.e., information on business transactions that have not yet been disclosed to the public) are prohibited from trading the Companys shares, five (5) trading guidelines for the Companys directors, officers and employees in the performance of their duties and responsibilities, and the manner by which they deal with investors, creditors, customers, contractors, suppliers, regulators and the public. The Code stresses the importance of integrity in the relationships and dealings with business partners, the Companys duties regarding employee welfare, the rights of shareholders, the protection of Company information assets and the promotion of corporate social responsibility. Guidelines on Acceptance of Gifts SMDCs directors, officers and employees are prohibited from soliciting or accepting gifts in any form from any business partner. The term gift covers anything of value, such as but not limited to cash or cash equivalent. The guidelines provide exceptions such as corporate give-aways, tokens or promotional items of nominal value. When it is deemed improper to refuse a gift, the issue is elevated to Management for proper disposition. In the same manner, travel sponsored by any current or prospective business partner is prohibited under the Guidelines on Travel Sponsored by Business Partners. Policy on Accountability, Integrity and Vigilance A whistle blower policy has been initiated and named, the Policy on Accountability, Integrity and Vigilance (PAIV). It was adopted to create an environment where concerns and issues may be raised in good faith, and processed within the organization. Insider Trading Policy

days before and two (2) trading days after the disclosure of quarterly and annual financial results and any other material information. To ensure compliance with the policy, SMDC issues reminders to everyone in the organization before the release of financial reports and the disclosure of material information. Related Party Transactions SMDC discloses in detail, the nature, extent and all other material information on transactions with related parties in the Companys financial statements and quarterly and annual reports to the Securities and Exchange Commission (SEC) and Philippine Stock Exchange (PSE). Management regularly presents the details of transactions entered into by the Company with related parties at the meetings of the Audit and Risk Management Committee. This is to ensure that SMDC conducts all related-party transactions on arms length basis.

Board of Directors
SMDCs Board of Directors ensures that the core principles of corporate governance are observed throughout the organization. It is the Boards responsibility to ensure the long term financial success of the business in a manner that upholds the principles of fairness, accountability and transparency, and ensures that the best interests of Company, its shareholders and various stakeholders are adequately promoted and protected. Board Composition The Board of Directors is composed of seven (7) directors, three (3) of whom are non-executive independent directors. As provided for by SMDCs Manual on Corporate Governance, an independent director must possess all of the qualifications, and none of the disqualifications, of a regular director. He must also be independent of Management, substantial shareholdings and material relations, whether it be business or otherwise, which could reasonably be perceived to impede the performance of independent judgment. Furthermore, none of SMDCs independent directors have served the Company as a regular director, officer or employee. The positions of the Chairman of the Board and the President are held by separate individuals.

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Directors Regular Henry Sy, Sr. Henry T. Sy, Jr. Rosaline Y. Qua Octavio V. Espiritu Ricardo J. Romulo Elizabeth T. Sy Leonora V. De Jesus 2/21/12 X

Regular & Organizational 4/25/12

Regular 7/31/12

Regular 11/06/12 X

Percentage

100% 100% 100% 100% 75% 75% 100%

Their functions and responsibilities are clearly defined in the Manual on Corporate Governance. It is the Companys practice that its non-executive directors meet at least once a year, without the presence of any executive directors or representatives of Management.

Nomination Committee
Ricardo J. Romulo

Chairman
(Independent Director)

two (2) of whom are independent directors, namely, Ms. Leonora V. De Jesus and Mr. Octavio V. Espiritu. Board Remuneration

Members of the Board of Directors receive a per diem of P10,000 (P20,000 for the Chairman and Vice Chairman) for each regular or special Board Regular meetings of the Board are held meeting or Board Committee meeting attended. Evaluation of the Board and President quarterly, but special meetings may be called Total compensation paid to directors is disclosed by the Chairman, the President or Corporate annually in the Definitive Information Statement Under the guidance of the Nomination Secretary at the request of any two (2) directors. Committee, the Board is tasked to conduct an sent to shareholders, together with the Notice of A directors absence or non-participation the Annual Stockholders Meeting. annual performance evaluation. The evaluation for whatever reason in more than 50% of all is based on the duties and responsibilities of the meetings, both regular and special, in a year is The Audit and Risk Management Committee Board of Directors, Board Committees, individual a ground for temporary disqualification in the directors and President as provided for by SMDCs succeeding election. The Audit and Risk Management Committee is Manual on Corporate Governance and By-Laws. composed of five (5) members, two (2) of whom Directors are asked to rate the performance of Board Committees are independent directors. The Committee the Board, the Board Committees, themselves as directly interfaces with the internal and external directors and the President, as the embodiment To aid in its corporate governance functions, the auditors in the conduct of their duties and of Management. Board established three (3) committees, namely responsibilities. Its mandate includes the the Nomination Committee, the Compensation review of the Companys financial reports and Directors are also asked to identify areas for and Remuneration Committee and the Audit and subsequent recommendation to the Board for improvement, such as training/continuing Risk Management Committee. Each committee approval. The Committee also reviews SMDCs education programs or any other forms has adopted a Charter which defines its internal control systems, its audit plans, auditing of assistance that they may need in the composition, roles and responsibilities based on processes and related party transactions. Under performance of their duties. The evaluation the provisions found in the Manual on Corporate its amended Charter, the Committee also reviews also includes items on support services given to Governance. and assesses the effectiveness of the Companys the Board, such as the quality and timeliness of risk management system in the mitigation of information provided to them, the frequency The Nomination Committee financial and non-financial risks. and conduct of regular, special or committee meetings and their accessibility to Management, The Nomination Committee reviews and the Corporate Secretary and Board Advisors. The evaluates the qualifications of all candidates Board then reviews and evaluates the results of Audit and Risk nominated to the Board of Directors, and those the evaluation, discusses possible changes that Management Committee nominated to positions that require Board may enhance the performance of the individual Octavio V. Espiritu Chairman approval under the Companys By-Laws. The directors, the support services given and the (Independent Director) Committee ensures that those nominated to the Board as a collective body. Ricardo J. Romulo Member Board meet the requirements set forth by the (Independent Director) Manual on Corporate Governance. Furthermore, The Compensation and Remuneration Committee Jose T. Sio Member Corazon I. Morando Member the Committee facilitates the annual performance Luis Y. Benitez Member evaluation of the Board as a whole, its respective The Compensation and Remuneration Committee Board Committees, the individual directors and is tasked with the oversight of policies pertaining the President. The Nomination Committee is to salaries and benefits, as well as promotions composed of three (3) members, two (2) of and other forms of career advancement. The whom are independent directors. Committee is composed of three (3) members,

Board Attendance

Leonora V. De Jesus Elizabeth T. Sy

Member
(Independent Director)

Member

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CORPORATE GOVERNANCE
Internal Audit SMDCs Internal Audit has a Charter that defines its roles and responsibilities. Under its Charter the primary purpose of Internal Audit is to provide an independent, objective, reasonable, systematic and disciplined evaluation of the Companys risk management, organization and procedural controls. The Charter requires the Internal Audit to do the following: Develop an annual audit plan using an appropriate risk-based methodology, including any risks or control concerns identified by Management, and submit such plan as well as periodic update thereof, to the Audit and Risk Management Committee for review and approval. Implement the approved annual audit plan, including special tasks or projects mandated by the Audit and Risk Management Committee. Issue periodic reports to the Audit and Risk Management Committee and Senior Management, summarizing results of audit activities. Assist in the investigation of significant suspected fraudulent activities within the Company and notify Management and the Audit and Risk Management Committee of the results. Consider the scope of work of the external auditors and regulators, as appropriate, for the purpose of providing optimal audit coverage to the organization at a reasonable overall cost. To maintain its independence, the Internal Auditor reports functionally to the Board of Directors, through the Audit and Risk Management Committee, and administratively to the President. The Internal Auditor is authorized to have unrestricted access to all functions, records, property and personnel in the conduct of his duties, and free access to communicate with the Audit and Risk Management Committee and Management. Enterprise Risk Management (ERM) The Board of Directors is tasked to oversee the risk management system of the Company through the Audit and Risk Management Committee. In 2012, the Committee took the following initiatives: Approved the whistle blower policy which has been named the Policy on Accountability, Integrity and Vigilance (PAIV). It provides for the process and safeguards of elevating concerns to Management on possible violations of anyone in the Company with regard to the Code of Ethics and other Company rules and regulations; Established a succession plan for the committee; Deliberated with the Internal Auditor and the External Auditor, SGV & Co. on the state of risk-based internal controls; Prioritized and approved the comprehensive IT Information Security Policy Framework; Reviewed the initial results of financial, operations, compliance and hazard risk assessments and mitigation exercises of core business units; Tasked Management to initiate an SM Group-wide awareness program on risk management; Approved the roll-out of the Enterprise Risk Management Program utilizing the Risk Register template as instrument in documenting and monitoring risks; Discussed the legal and regulatory risks of pending bills in Congress, rules from regulators and bills enacted into law that have significant impact to the Company; Suggested to Management to look into the evolving ASEAN Corporate Governance initiative from the regulators and advocacy groups and see what other enhancements can be appropriately pursued; Undertook the SEC-mandated SelfAssessment of the Performance of the Audit Committee under SEC Memorandum Circular No. 4, issued in 2012 and approved the areas of improvement and action plan resulting from said exercise. Disaster Preparedness Program As part of its Enterprise Risk Management, SMDC implements a disaster preparedness program that aims to safeguard its workforce, operations and customers against natural and manmade disasters. In coordination with fire and security agents, the Company conducts regular safety drills throughout the SMDC workplace. These drills, along with disaster management related orientations and training are conducted to ensure a competent, composed and efficient response from SMDCs workforce in the event of a disaster. Furthermore, the Company has adopted a Call Tree as a means to effectively communicate with and ensure the safety of its employees during an emergency.

Disclosure and Transparency


As provided for in its Manual on Corporate Governance, SMDC is committed to providing its shareholders and the public, timely and accurate information on the Company and its business. In accordance with this, SMDC regularly updates its website and practices full and prompt disclosure of all material information. The website has a separate corporate governance section that features among others, policies, programs and other relevant corporate governance information. SMDC arranges teleconferences and site visits for investors, and conducts annual non-deal roadshows in various locations throughout the world. Furthermore, SMDC also conducts regular briefings and meetings with investors, analysts and the press to keep them updated on the Companys various projects, financial and operational results. The presentation materials at these briefings, as well as the Companys SEC and PSE reports and annual reports, may be viewed and downloaded from the website. (Please visit SMDCs website at www.smdevelopment.com for access to disclosures, write-ups and other company information.) Ownership Structure SMDC regularly discloses its beneficial owners holding more than 5% of its shares, the shareholdings of its directors and senior management and its other top shareholders. SMDC employs the one-share, one-vote and only has one type of shares, common.

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The Annual Stockholders Meeting SMDCs Annual Stockholders Meeting (ASM) gives the Companys shareholders an opportunity to raise concerns, give suggestions and vote on relevant issues. Voting methods are clearly defined and explained to shareholders to ensure the observance of their voting rights and continued participation in the voting process. Prior to the ASM, shareholders are furnished a copy of the annual report, including financial statements, and all relevant information about the current and nominated directors and key officers. Elected directors hold office for one (1) year until their successors are elected following the procedures set forth in the Companys ByLaws. All Board members are duly screened and deemed eligible and qualified by the Nomination Committee.

information and receive an equitable share of the Companys profits. Under the Manual, the Board is tasked to promote shareholder rights, remove impediments to the exercise of these rights and provide remedies for violations of the same. Employee Welfare SMDC aspires to be an employer of choice and provides for the health, safety and welfare of its employees. Through the efforts of its Human Resources Department (HRD), the Company has established policies and programs that promote a safe and healthy work environment that caters to all cultures and creeds and encourages employee development and growth. Wellness Program

of the Code of Ethics, which focus on employee rights and obligations, as well as the promotion of good work ethics and values. Corporate Social Responsibility (CSR) SMDC recognizes the importance of assisting and nurturing the communities it operates in, as well as the impact it has on the environment. The Company works closely with SM Foundation, Inc., the CSR arm of the SM Group of Companies, to ensure the continued development of its various education, civic and environmental programs. (For more information on the Companys CSR programs, please visit the Corporate Social Responsibility section of the SMDC website at www.smdevelopment.com.)

Citations

The Company encourages good health and SMDC was one of the Gold Awardees during the Proxy voting is permitted and facilitated through wellness through its various sports and fitness Institute of Corporate Directors (ICD) Annual proxy forms which are distributed to shareholders programs. Employees can enjoy the CompanyDinner held on 30 May 2012. The award is prior to the ASM. Proxy forms may also be owned courts and fitness facilities after work. based on the Companys performance in the ICD downloaded from the Companys website. To Everyone is encouraged to participate in HRD Scorecard. The ICD Scorecard is a project of the encourage shareholders to apply their right to supported aerobic and dance activities. The ICD, PSE and SEC, which rates companies on their vote through the proxy forms, notarization of Company also conducts orientations and learning the proxy forms is not required. Shareholders sessions on health-related matters, such as breast corporate governance practices. are also given the opportunity to vote on certain and cervical cancer awareness and detection; On 30 June 2012, Corporate Governance Asia corporate acts in accordance with law. These influenza and hepatitis B prevention and drug (CG Asia) awarded SMDCs Vice Chairman, Mr. resolutions, along with shareholder questions abuse awareness, to name a few. Furthermore, Henry T. Sy, Jr. with the Best CEO for Investor and the corresponding responses are recorded the Company facilitates the distribution and Relations. He was also among those awarded in the minutes of the ASM. To ensure that all administration of essential vaccines, has a fully the Asian Corporate Director Award. CG Asia is shareholders concerns are properly addressed, functioning clinic and has recently employed the the only publication that specializes in corporate the Chairman of the Board, Board Directors, services of a 24-hour roving ambulance service. governance in the region. the President, Board Committee Chairmen and Members, Senior Management, the Corporate Orientations and Trainings Moving Forward Secretary and the Independent Auditors are always present during the ASM. SMDC invests heavily in the development of its SMDC continues to strengthen its corporate directors, officers and employees. The Company governance practices, as well as support the Other Shareholder Rights conducts various internal training activities and initiatives of the public and private sectors that provides members of its workforce opportunities espouse the development of good governance in Minority shareholders are given the right to to attend and participate in activities offered by the country. propose the holding of a meeting as well as external entities. (For details on SMDCs training the right to propose items in the agenda of activities, please refer to the Companys website the meeting, provided that the items are for at www.smdevelopment.com) legitimate business purposes and in accordance with law, jurisprudence and best practice. Through the HRDs Orientation for New Minority shareholders are also given access Employees of SM (ONE SM), new employees to information relating to matters for which are given an overview of SMDCs corporate Management is accountable. governance framework, policies and its various components. It also covers the importance Shareholders have the right to receive dividends of integrity and ethics in the business, the subject to the discretion of the Board. SMDCs Companys core values and the role that each Manual on Corporate Governance protects the individual must play in the overall development shareholders rights to vote, inspect corporate of the corporate governance culture. Also books and records, gain access to material included in the orientation are the salient points

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SM DEVELOPMENT CORPORATION

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CORPORATE INFORMATION

Legal Counsel
SyCip, Salazar, Hernandez and Gatmaitan Law Offices 4th Floor, SSHG Law Office 105 Paseo de Roxas, Makati City

External Auditor

SyCip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati City

Stockholder Inquiries

SM Development Corporations common stock is listed and traded in the Philippine Stock Exchange under the symbol SMDC. Inquiries regarding dividend payments, account status, address changes, stock certificates, and other pertinent matters may be addressed to the companys transfer agent:

BDO Unibank, Inc. Trust and Investments Group SEC Form 17-A

15th Floor South Tower, BDO Corporate Center, Makati Avenue, Makati City Tel. (632) 840.7000 local 6979 Fax (632) 878.4056 The financial information in this report, in the opinion of Management, substantially conforms with the information required in the 17-A Report submitted to the Securities and Exchange Commission. Copies of this report may be obtained free of charge upon written request addressed to the Office of the Corporate Secretary.

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


FINANCIAL POSITION 2012 vs. 2011 Dec. 2012 P8,176,966,683 26,539,189,285 579,476,898 4,974,322,706 1,857,043,842 29,106,844,999 3,126,232,680 734,656,092 457,957,302 279,546,136 4,365,610,940 P80,197,847,563 P24,713,776,921 14,742,750,698 22,386,695 26,114,521 554,594,962 P40,059,623,797 P9,271,204,239 13,433,597,654 14,544,476,059 2,888,945,814 P40,138,223,766 Dec. 2011 P5,913,175,491 16,193,071,444 384,002,340 4,727,131,762 572,040,857 19,801,431,718 1,121,565,385 707,288,148 244,487,948 126,496,577 4,134,089,000 P53,924,780,670 P10,944,225,993 7,156,864,178 2,155,185 25,687,463 387,814,573 P18,516,747,392 P8,428,368,621 13,433,597,654 10,904,312,133 2,641,754,870 P35,408,033,278 % Change 38% 64% 51% 5% 225% 47% 179% 4% 87% 121% 6% 49% 126% 106% 939% 2% 43% 116% 10% 0% 33% 9% 13%

Cash and Cash Equivalents Trade and Other Receivables Investments Held for Trading Available-for-Sale Investments Condominium Units for Sale Land and Development Advances for Project Development Investment Property Property and Equipment, net Deferred Tax Assets Other Assets Total Assets Loans Payable Accounts Payable and Other Liabilities Income Tax Payable Dividends Payable Deferred Tax Liability Total Liabilities Capital Stock Additional Paid-in Capital Retained Earnings Unrealized Mark-to-Market Gain on Available-for-Sale Investments Total Stockholders Equity

SM Development Corporation (SMDC) is engaged in the development and sale of residential condominium units. As of December 31, 2012, SMDC currently has 19 residential projects. Included in the residential projects are Breeze Residences in Pasay City and Grace Residences in Taguig City which were both launched in 2012. The Company has acquired real properties in various locations during the same year with a total land area of 23 hectares as a response to the escalating demand for residential dwellings. Financial Condition as at December 31, 2012 compared to as at December 31, 2011 The Companys total resources as of December 31, 2012 reached P80.2 billion, 49% or P26.3 billion higher than December 31, 2011 level of P53.9 billion. 38% Increase in Cash and Cash Equivalents The increase in Cash and Cash Equivalents was due to loans availed primarily for landbanking and development. 64% Increase in Trade and Other Receivables The increase of P10.3 billion was attributable to a high sales volume from new projects and construction accomplishments of existing projects. 51% Increase in Held for Trading Investment An investment under this portfolio both had an increase in equity shares due to stock split and increase in market value. 5% Increase in Available for Sale Investments The increase of 5% was due to higher market prices of equity shares held under these portfolios. 225% Increase in Condominium Units for Sale The increase was due to the completion of Ready for Occupancy (RFO) units of Mezza Residences, Chateau Elysee, Berkeley Residences, Sea Residences, Grass Residences, and Field Residences. 47% Increase in Land and Development The increase was due to the newly acquired land in various locations within Metro Manila and additional construction accomplishments of existing projects. 179% Increase in Advances for Project Development The increase was due to an ongoing acquisition of property for development.

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


4% Increase in Investment Property The increase was due to new acquisitions of investment property. 87% Increase in Property and Equipment The increase was due to the additional costs of leasehold improvements for office and showrooms. 121% Increase in Deferred Tax Assets The increase was due to the effect of recognition of certain accrued expenses, net operating loss carryover, allowance for doubtful accounts, and minimum corporate income tax in 2012. 6% Increase in Other Assets The increase was mainly due to various deposits made in connection with the acquisition of real properties and recognition of input taxes from capital expenditures. 126% Increase in Loans Payable The increase was due to the long term and short term loans availed primarily for landbanking and development. 106% Increase in Accounts Payable and Other Liabilities The increase was mainly due to accruals and actual progress billings related to on-going project development, reservations from buyers of newly launched projects and obligations from land acquisitions. 939% Increase in Income Tax Payable The increase was due to higher taxable income in 2012 compared as a result of the expiration of income tax holiday incentives of certain projects. 43% Increase in Deferred Tax Liability The increase was due to the effect of recognition of unrealized gross profit and borrowing costs. 10% Increase in Capital Stock The increase was due to the 10% stock dividends distributed in 2012. 9% Increase in Unrealized Mark-to-Market Gain on Available-for-Sale Investments The increase was due to the appreciation in prices of equity shares held classified under this account. RESULTS OF OPERATIONS 2012 vs. 2011 Dec. 2012 P21,578,437,825 353,594,843 33,913,390 195,474,558 691,944,061 22,853,364,677 13,534,983,227 1,447,927,599 1,168,065,736 700,997,225 332,288,088 184,886,241 170,401,606 122,340,093 107,206,782 62,271,429 31,387,533 17,862,755,559 86,191,141 P4,904,417,976 Dec. 2011 P16,183,740,954 423,044,526 101,333,465 29,337,606 3,333,996 162,334,033 16,903,124,580 9,674,492,156 1,071,355,183 531,849,980 727,733,344 259,068,393 64,318,437 155,061,888 101,803,401 80,572,082 53,388,216 25,300,299 12,744,943,379 (17,118,579) P4,175,299,780 % Change 33% -16% -100% 16% 5763% 326% 35% 40% 35% 120% -4% 28% 187% 10% 20% 33% 17% 24% 40% -603% 17%

Revenue from Real Estate Sales Interest Income Gain (loss) on Sale of Available-for-Sale Investments Dividend Income Unrealized Mark-to-Market Gain on Investments Held for Trading Other Income Total Revenues Cost of Real Estate Sold Marketing and Selling Expenses Brokerage Fees and Commissions Interest Expense Salaries Wages and Benefits Rentals and Utilities Taxes and Licenses Depreciation Provision for Doubtful Accounts Representation and Entertainment Management and Professional Fees Total Costs and Expenses Provision for Income Tax Net Income

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Results of Operations for the year ended December 31, 2012 compared to the year ended December 31, 2011. The Company posted a net income of 4.9 billion, 17% higher compared to year of 2011. In a recent study done by the Advisory and Research Services of Colliers International Philippines, SMDC captured the top spot in terms of number of units sold which corresponds to a 23% market share of the residential condominium units that were sold by the industry during 2012. In addition, SMDC is among the top real estate developer of the residential condominium units sold in terms of value in the same year garnering 15% market share. 33% Increase in Revenue from Real Estate Sales The increase was due to higher sales volume base and higher construction accomplishments as of 2012 compared with 2011. 16% Decrease in Interest Income The decrease was attributable to the lower interest income generated from temporary money market placements. 100% Decrease in Gain on Sale of Investments Held for Trading and Available-for-Sale Investments No equity shares were sold by the Company in 2012. 16% Increase in Dividend Income The increase was due to higher cash dividends per share from investments in equity shares. 5763% Increase in Unrealized Mark-to-Market Gain on Investments Held for Trading The increase was due to increase in equity shares by stock split and higher market price of equity securities held under this account. 326% Increase in Other Income The increase was due mainly to higher income in 2012 from forfeitures and recurring commercial activities. 40% Increase in Cost of Real Estate Sold The cost of real estate sold grew due to the additional costs incurred in changing the design of certain condominium units. 35% Increase in Marketing and Selling Expense The increase was attributable to the enhanced selling events and activities locally and abroad and also from media communication spending. 120% Increase in Brokerage Fees and Commissions The increase resulted from the commission and incentives recognized as a result of higher sales volume generated, change in commission payment milestones, and higher sales force. 4% Decrease in Interest Expense Despite the increase in loans, interest expense decreased as a result of higher capitalized borrowing costs. 28% Increase in Salaries and Benefits The increase was attributable to the additional manpower complement to manage increased sales volume, new projects and customers. 10% Increase in Taxes and Licenses The bulk of the increase was payment of real property taxes from the newly acquired properties. 20% Increase in Depreciation The increase was mainly due to the new leasehold improvements for the Companys office and selling activities. 187% Increase in Rental and Utilities The increase was due to billings for the new leased office occupied in 2012. 33% Increase in Provision for Doubtful Accounts The Company made additional provisions for its long outstanding customer accounts. 17% Increase in Representation and Entertainment Representation and Entertainment expenses increased due to the expanded volume of sales of the company. 24% Increase in Management and Professional Fees The increase was primarily due to the professional services availed in connection with the acquisition of real properties. 603% Increase in Provision for Income Tax The increase was due to the higher taxable income in the current period brought about by the accounts with expiring income tax holiday incentives and low realization of income from the newly registered accounts from the Board of Investments.

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


KEY PERFORMANCE INDICATORS: Ratios 2012 1.60:1.00 2.00:1.00 0.65:1.00 0.44:1.00 6.1% 12.2% 8.1:1.00 2011 3.06:1.00 1.52:1.00 0.31:1.00 0.14:1.00 7.7% 11.8% 6.71:1.00 2010 2.90:1.00 1.70:1.00 0.39:1.00 0.05:1.00 6.9% 11.8% 8.26:1.00

Current ratio Asset to equity ratio Debt-to-equity ratio Net debt-to-equity ratio Return on assets Return on equity Interest rate coverage ratio PLAN OF OPERATIONS:

SMDC continuously responds to the increasing demand for affordable residential dwellings. For the year 2013 only, SMDC is targeting to launch at least four new projects in various cities within Metro Manila and three expansion buildings of ongoing projects which will bring in over 12,000 new condominium units in the market. Although the units to be marketed are infused with the latest innovations in housing development, they remain to be affordable to potential buyers due to its value-engineering employed in the construction of projects. There are adequate sources of landbanking, construction materials and services, and funds available for SMDC to execute the plans to deliver its product in the market. SMDC is also equipped with a group of talented professionals, sales force, and key management personnel working together to fulfill the mission for its market, investors, and the community it serves. In addition, SMDC maximizes its synergy with other companies with the SM Group to make the SM products and services available and accessible for all their target markets in the country. By carrying the SM brand, SMDC has an unsurpassed advantage over its competitors due to the recognition, integrity, and reliability the SM Group has earned throughout the years. Material Event/s and Uncertainties: a.) There were no events that will trigger direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation. b.) There were no material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the company with unconsolidated entities or other persons created during the reporting period. c.) There are no known trends, events, material changes, seasonal aspects or uncertainties that are expected to affect the companys continuing operations.

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

REPORT OF THE AUDIT AND RISK MANAGEMENT COMMITTEE


The Audit and Risk Management Committee assists the Board of Directors in fulfilling its oversight responsibilities to ensure the integrity and adequacy of the financial reporting process, the internal control system, the audit process, the companys risk management system and compliance with pertinent laws, rules and regulations. The Committee likewise oversees special investigations as may be necessary and reviews its Charter annually. In compliance with the Audit and Risk Management Committee Charter, the Manual on Corporate Governance and pertinent laws, rules and regulations, we confirm that: The Audit and Risk Management Committee is composed of five (5) members, two (2) of whom are independent directors, namely Atty. Ricardo J. Romulo and Committee Chairman, Mr. Octavio V. Espiritu; We met three (3) times in 2012 (on February 21, July 31 and November 6); Members Octavio V. Espiritu Jose T. Sio Corazon I. Morando Luis Y. Benitez Ricardo J. Romulo 2/21/12 X 7/31/12 11/06/12 Percentage 100 100 100 100 67

Each member of the Committee possesses adequate knowledge and competence of finance and accounting processes; We have reviewed and approved the amended Audit and Risk Management Committee Charter consistent with the provisions in SEC Memorandum Circular No. 4 on the Self-Assessment of the Performance of Audit Committees. Furthermore, we complied with the required self-assessment and submission of the results to the SEC accordingly. Subject Charter was ratified by the Board of Directors; We have reviewed and approved the following with regard to our Independent Auditor, SGV & Co. and our Internal Auditor: - - - Their respective annual audit plans and strategic direction, scope, risk-based methods and time table; The results of their examinations and action plan to address pending audit issues; and The assessment of internal controls and quality financial reporting;

We have received and reviewed the report of SGV & Co. on significant accounting issues, changes in accounting principles, relevant pending tax legislation which would impact the financial statements of SM Development Corporation; We have reviewed and approved all audit services provided by SGV & Co., and related audit fees; We have reviewed and ensured that the Companys related party transactions are conducted at arms length basis; We have discussed the status of the Enterprise Risk Management system roll-out across the listed companies of the SM Group, with initial focus on Financial, Information Technology, Operational and Compliance Risks; We have discussed with SGV & Co. the matters required to be discussed by the prevailing applicable Auditing Standards, and we have received written disclosures and the letter from SGV & Co. as required by prevailing applicable Independence Standards and have discussed with SGV & Co., its independence; We have reviewed the financial statements of SM Development Corporation for the first quarter ended March 31, 2012, six month period ended June 30, 2012, and third quarter ended September 30, 2012; Based on its review and discussion, and subject to the limitations on the roles and responsibilities referred to above, the Committee recommended for Board approval, and the Board approved, the audited financial statements of SM Development Corporation for the year ended December 31, 2012. We have reviewed and discussed the performance, independence and qualifications of the Independent Auditor, SGV & Co., in the conduct of their audit of the financial statements of SM Development Corporation for the year. Based on the review of their performance and qualifications, the Committee also recommends the re-appointment of SGV & Co. as external auditors for 2013.

19 February 2013

OCTAVIO V. ESPIRITU* Chairman

ATTY. RICARDO J. ROMULO* Member

JOSE T. SIO Member

LUIS Y. BENITEZ Member

ATTY. CORAZON I. MORANDO Member

ATTY. EMMANUEL C. PARAS Corporate Secretary


*Independent Director

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ANNUAL REPORT 2012

SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

STATEMENT OF MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS


The management of SM Development Corporation and its Subsidiaries is responsible for the preparation and fair presentation of the consolidated financial statements for the years ended December 31, 2012 and 2011, including the additional components attached therein, in accordance with Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. The Board of Directors reviews and approves the consolidated financial statements and submits the same to the stockholders. SyCip Gorres Velayo & Co., the independent auditors, appointed by the stockholders has examined the consolidated financial statements of the Company in accordance the Philippine Standards on Auditing, and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination.

GEMA O. CHENG Chief Financial Officer

VIRGINIA A. YAP Treasurer

HENRY T. SY, JR. Vice Chairman and Chief Executive Officer

HENRY SY, SR. Chairman

SUBSCRIBED AND SWORN TO before me this _____________________ in the city of _____________, affiants exhibiting to me their Competent Evidence of Identity.

Names Henry Sy, Sr. Henry T. Sy, Jr. Virginia A. Yap Gema O. Cheng

CTC/CEI Passport XX1846270 Passport EB1984540 Passport EB23196569 D/L N06-84-036923

Date of Issue 19 Aug 2008 25 Feb 2011 03 May 2011 12 Jan 2012

Place of Issue Manila Manila Manila Quezon City

DOC NO. 189 PAGE NO. 39 BOOK NO. 12 SERIES OF 2013

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

27

SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

INDEPENDENT AUDITORS REPORT


The Stockholders and the Board of Directors SM Development Corporation 15th Floor, Two E-Com Center Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City We have audited the accompanying consolidated financial statements of SM Development Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SM Development Corporation and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO.

Clairma T. Mangangey Partner CPA Certificate No. 86898 SEC Accreditation No. 0779-AR-1 (Group A), February 2, 2012, valid until February 1, 2015 Tax Identification No. 129-434-867 BIR Accreditation No. 08-001998-67-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669697, January 2, 2013, Makati City February 19, 2013

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

2012 ASSETS Cash and Cash Equivalents (Notes 6, 19, 24, 25 and 26) Receivables and Advances (Notes 7, 19, 24, 25 and 26) Investments Held for Trading (Notes 8, 19, 24, 25 and 26) Available-for-Sale Investments (Notes 9, 19, 24, 25 and 26) Condominium Units for Sale (Notes 10 and 26) Land and Development (Notes 10, 16 and 19) Advances for Project Development (Notes 19 and 26) Investment Property (Note 12) Property and Equipment (Note 13) Deferred Tax Assets (Note 21) Deposits and Other Assets (Notes 14, 19, 20, 24, 25 and 26) P8,176,966,683 26,539,189,285 579,476,898 4,974,322,706 1,857,043,842 29,106,844,999 3,126,232,680 734,656,092 457,957,302 279,546,136 4,365,610,940 P80,197,847,563 LIABILITIES AND EQUITY Liabilities Loans payable (Notes 15, 19, 24, 25 and 26) Accounts payable and other liabilities (Notes 16, 19, 24, 25 and26) Customers deposits (Notes 17 and 26) Income tax payable (Note 26) Dividends payable (Notes 18, 24, 25 and 26) Deferred tax liabilities (Note 21) Total Liabilities Equity Capital stock (Note 18) Additional paid-in capital (Note 18) Retained earnings (Note 18) Unrealized mark-to-market gain on available-for-sale investments (Note9) Total Equity P24,713,776,921 13,012,504,908 1,730,245,790 22,386,695 26,114,521 554,594,962 40,059,623,797 9,271,204,239 13,433,597,654 14,544,476,059 2,888,945,814 40,138,223,766 P80,197,847,563
See accompanying Notes to Consolidated Financial Statements.

December 31 2011 P5,913,175,491 16,193,071,444 384,002,340 4,727,131,762 572,040,857 19,801,431,718 1,121,565,385 707,288,148 244,487,948 126,496,577 4,134,089,000 P53,924,780,670

P10,944,225,993 5,109,879,194 2,046,984,984 2,155,185 25,687,463 387,814,573 18,516,747,392 8,428,368,621 13,433,597,654 10,904,312,133 2,641,754,870 35,408,033,278 P53,924,780,670

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ANNUAL REPORT 2012

29

SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

2012 REVENUE FROM REAL ESTATE SALES (Notes10 and 19) COSTS OF REAL ESTATE SOLD (Note10) GROSS PROFIT OPERATING EXPENSES Marketing and selling expenses (Note 19) Brokerage fees and commissions Salaries, wages and benefits (Note 20) Rentals and utilities (Note 19) Taxes and licenses Depreciation (Notes 12 and 13) Provision for doubtful accounts (Note 7) Entertainment, amusement and recreation Management and professional fees P21,578,437,825 13,534,983,227 8,043,454,598 1,447,927,599 1,168,065,736 332,288,088 184,886,241 170,401,606 122,340,093 107,206,782 62,271,429 31,387,533 3,626,775,107 4,416,679,491 (700,997,225) 353,594,843 195,474,558 33,913,390 25,550,785 666,393,275 4,990,609,117 72,460,311 13,730,830 86,191,141 P4,904,417,976 P0.53

Years Ended December 31 2011 P16,183,740,954 9,674,492,156 6,509,248,798 1,071,355,183 531,849,980 259,068,393 64,318,437 155,061,888 101,803,401 80,572,082 53,388,216 25,300,299 2,342,717,879 4,166,530,919 (727,733,344) 423,044,526 3,333,996 29,337,606 39,766,664 101,333,465 122,567,369 4,158,181,201 40,887,114 (58,005,693) (17,118,579) P4,175,299,780 P0.45

2010 P9,118,069,504 5,041,144,537 4,076,924,967 498,565,299 386,845,487 167,073,111 63,319,260 112,692,169 66,330,571 31,352,272 8,628,400 1,334,806,569 2,742,118,398 (436,462,009) 301,956,872 95,578,405 39,956,622 28,774,427 349,434,031 49,152,903 3,170,509,649 168,827,380 (19,997,883) 148,829,497 P3,021,680,152 P0.42

Interest expense (Notes 7, 15, 16 and 19) Interest income (Notes 6, 7, 9, 14 and 19) mark-to-market gainS on investments held for trading (Note 8) Dividend INCOME (Note 19) Management fee (Note 19) Gain on sale of available-for-sale investments (Notes 9 and 19) FORFEITED DEPOSITS AND Other INCOME - Net (Notes 9, 12, 17 and 19) INCOME BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX (Notes 21 and 27) Current Deferred NET INCOME Basic/Diluted Earnings Per Share (Note22)
See accompanying Notes to Consolidated Financial Statements.

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2012 NET INCOME OTHER COMPREHENSIVE INCOME Unrealized mark-to-market gain on available-for-sale investments - net (Note 9) TOTAL COMPREHENSIVE INCOME
See accompanying Notes to Consolidated Financial Statements.

Years Ended December 31 2011 P4,175,299,780

2010 P3,021,680,152

P4,904,417,976

247,190,944 P5,151,608,920

465,357,690 P4,640,657,470

1,546,166,327 P4,567,846,479

SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


2012 CAPITAL STOCK (Note 18) Balance at beginning of year Stock dividends Collection (receivable) from subscription Stock rights issuance Balance at end of year ADDITIONAL PAID-IN CAPITAL (Note 18) Balance at beginning of year Collection (receivable) from subscription Additions Balance at end of year RETAINED EARNINGS (Note 18) Appropriated: Balance at beginning of year Additions Balance at end of year Unappropriated: Balance at beginning of year Net income Appropriation of retained earnings Cash dividends - P0.05 per share in 2012, P0.1 per share in 2011 and P0.08 per share in 2010 Stock dividends - 10% a share in 2012 and 15% a share in 2011 Balance at end of year UNREALIZED MARK-TO-MARKET GAIN ON AVAILABLE-FOR-SALE INVESTMENTS (Note 9) Balance at beginning of the year Other comprehensive income Balance at end of year P8,428,368,621 842,835,618 9,271,204,239 13,433,597,654 13,433,597,654 Years Ended December 31 2011 P6,412,322,543 1,100,000,000 916,046,078 8,428,368,621 8,505,270,332 4,928,327,322 13,433,597,654

2010 P4,122,207,350 (916,046,078) 3,206,161,271 6,412,322,543 204,912,695 (4,928,327,322) 13,228,684,959 8,505,270,332

1,500,000,000 4,500,000,000 6,000,000,000 9,404,312,133 4,904,417,976 (4,500,000,000) (421,418,432) (842,835,618) 8,544,476,059 14,544,476,059

1,500,000,000 1,500,000,000 7,061,849,215 4,175,299,780 (732,836,862) (1,100,000,000) 9,404,312,133 10,904,312,133

1,500,000,000 1,500,000,000 4,479,871,180 3,021,680,152 (439,702,117) 7,061,849,215 8,561,849,215

2,641,754,870 247,190,944 2,888,945,814 P40,138,223,766

2,176,397,180 465,357,690 2,641,754,870 P35,408,033,278

630,230,853 1,546,166,327 2,176,397,180 P25,655,839,270

See accompanying Notes to Consolidated Financial Statements.

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ANNUAL REPORT 2012

31

SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Interest expense Interest income Mark-to-market gains on investments held for trading (Note 8) Depreciation (Notes 12 and 13) Dividend income (Note 19) Pension expense (Note 20) Unrealized foreign exchange loss (gain) Gain on sale of available-for-sale investments (Notes 9 and 19) Impairment loss on available-for-sale investments (Note 9) Operating income before working capital changes Decrease (increase) in: Receivables and advances Condominium units for sale (Note 28) Land and development (Note 28) Advances for project development Increase (decrease) in accounts payable and other liabilities Contributions to pension plan assets (Note 20) Cash used for operations Interest received Income tax paid Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Increase in deposit and other assets Additions to: Investment property and property and equipment (Notes 12, 13 and 28) Available-for-sale investments (Notes 9, 19 and 28) Proceeds from: Sale of investments held for trading and available-for-sale investments (Notes 8 and 9) Maturity of bonds Dividends received Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Availments of loans (Note 15) Stock rights offering (Note 18) Payments of: Loans Interest Cash dividends Net cash provided by financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR
See accompanying Notes to Consolidated Financial Statements.

2012 P4,990,609,117 700,997,225 (353,594,843) (195,474,558) 122,340,093 (33,913,390) 16,088,412 (7,912,723) 5,239,139,333 (10,342,117,841) 732,840,222 (10,954,118,491) (2,004,667,295) 7,458,358,541 (22,277,923) (9,892,843,454) 349,594,843 (52,228,801) (9,595,477,412) (225,332,429) (117,037,250) 33,913,390 (308,456,289)

Years Ended December 31 2011 P4,158,181,201 727,733,344 (423,044,526) (3,333,996) 101,803,401 (29,337,606) 9,352,030 5,469,737 (101,333,465) 4,445,490,120 (8,272,842,828) 230,383,360 (2,904,079,345) 712,339 (538,835,621) (17,118,363) (7,056,290,338) 423,122,187 (74,447,934) (6,707,616,085) (916,214,834) (69,049,536) (335,076,173) 107,700,000 29,337,606 (1,183,302,937)

2010 P3,170,509,649 436,462,009 (301,956,872) (95,578,405) 66,330,571 (39,956,622) 13,881,857 (14,914,483) (349,434,031) 32,558,198 2,917,901,871 (2,974,686,457) 214,798,841 (8,478,742,348) 179,233,107 2,471,643,424 (12,031,055) (5,681,882,617) 306,620,834 (228,753,940) (5,604,015,723) (2,445,952,350) (126,611,487) 556,638,917 250,000,000 50,180,200 (1,715,744,720)

18,747,206,398 (5,000,000,000) (1,166,402,854) (420,991,374) 12,159,812,170 7,912,723 2,263,791,192 5,913,175,491 P8,176,966,683

1,000,000,000 5,844,373,400 (1,037,778,758) (730,896,429) 5,075,698,213 (5,469,737) (2,820,690,546) 8,733,866,037 P5,913,175,491

11,196,785,610 10,590,472,830 (5,285,781,161) (740,424,823) (438,205,824) 15,322,846,632 14,914,483 8,018,000,672 715,865,365 P8,733,866,037

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SM DEVELOPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Corporate Information SM Development Corporation (the Parent Company) is incorporated in the Philippines and was registered with the Philippine Securities and Exchange Commission (SEC) on July 12, 1974. The Parent Company and its wholly owned subsidiaries, collectively referred to as the Company, are involved in real estate development and investments in various securities. The registered office address of the Parent Company is 15th Floor, Two E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City. The Parent Companys shares of stock are publicly listed and traded in the Philippine Stock Exchange (PSE). The Parent Company is 65.18% owned by SM Land, Inc. (SM Land), a company incorporated in the Philippines. SM Land is a 66.89% owned subsidiary of SM Investments Corporation (SMIC). SMIC, a company incorporated in the Philippines which listed its common shares of stock with PSE in 2005, is the ultimate parent company. The accompanying consolidated financial statements were authorized for issue in accordance with a resolution by the Board of Directors (BOD) on February 19, 2013.

2.

Basis of Preparation and Statement of Compliance Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis except for investments held for trading and available-for-sale (AFS) investments that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is the Parent Companys functional and presentation currency. Amounts are rounded off to the nearest peso unit, except when otherwise indicated. Statement of Compliance The accompanying consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS also includes Philippine Accounting Standards (PAS), including Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council. Basis of Consolidation The consolidated financial statements include the accounts of the Parent Company and the following subsidiaries as of December31, 2012: Company SM Synergy Properties Holdings Corporation (SM Synergy) SM Residences Corp. (SMRC) Landfactors Incorporated (Landfactors) Vancouver Lands, Inc. (VLI) Twenty Two Forty One Properties, Inc. (TTFOPI) New Guadix Land Corporation (GLC) Lascona Land Company, Inc. (LLCI) Metro South Davao Property Corporation (MSDPC) SMDC HK Limited (SMDC HK) Place of Incorporation Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Hong Kong Ownership Interest 100% 100% 100% 100% 100% 100% 100% 100% 100%

The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies. All intracompany balances, transactions, income and expenses and profits and losses resulting from intra-company transactions are eliminated in full. Subsidiaries are consolidated from the date of acquisition or incorporation, being the date on which the Company obtains control, and continue to be consolidated until the date such control ceases.

3.

Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year, except for the following amended PAS and PFRS which the Company has adopted during the year: PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendments) PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments)

The adoption of these amended standards did not have any impact on the consolidated financial statements of the Company. Future Changes in Accounting Policies The Company did not early adopt the following new standards, amendments and improvements to PFRS and Philippine Interpretations that have been approved but are not yet effective. The Company does not expect these changes to have a significant impact on its consolidated financial statements unless otherwise indicated. PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income (OCI) (Amendments), will become effective for annual periods beginning on or after July 1, 2012. The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be reclassified. The amendments will be applied retrospectively and will result to the modification of the presentation of items of OCI. PAS 19, Employee Benefits (Revised), will become effective for annual periods beginning on or after January 1, 2013. Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on assetliability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. Once effective, the Company has to apply the amendments retroactively to the earliest period presented. The Company reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Company obtained the services of an external actuary to compute the impact of adoption of the standard to its consolidated financial statements.

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33

The estimated impact on the Companys consolidated financial statements is detailed below: As at December 31, 2012 (P6,634,577) (196,747) (1,789,972) 6,296,453 (1,990,373) (59,024) As at January 1, 2012 (P2,773,115) 152,636 (3,632,696) 5,680,722 (831,935) 45,791 As at January 1, 2011 P11,417,959 380,904 (5,865,081) (1,860,858) 3,425,388 114,271

Consolidated balance sheets Increase (decrease) in net defined benefit liability Increase (decrease) in net defined benefit asset Increase (decrease) in other comprehensive income Increase (decrease) in retained earnings Increase (decrease) in deferred tax asset Increase (decrease) in deferred tax liability

Consolidated statements of income Decrease in net benefit cost Increase in income tax expense

2012 (P2,805,422) 841,627

2011 (P348,984) 104,695

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendments). The amendments to PAS 32 are to be applied retrospectively for annual periods beginning on or after January 1, 2014. These amendments to PAS 32 clarify the meaning of currently has a legally enforceable right to offset and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Company, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments). The amendments to PFRS 7 are to be applied retrospectively for annual periods beginning on or after January 1, 2013. These amendments require an entity to disclose information about rights of offset and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: (a) (b) (c) (d) The gross amounts of those recognized financial assets and recognized financial liabilities; The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the consolidated balance sheet; The net amounts presented in the consolidated balance sheet; The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. ii. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and Amounts related to financial collateral (including cash collateral).

(e) The net amount after deducting the amounts in (d) from the amounts in (c) above. PFRS 9, Financial Instruments, will become effective for annual periods beginning on or after January 1, 2015. PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through OCI or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liabilitys credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The Company has made an evaluation of the impact of the adoption of this standard. The Company decided not to early adopt PFRS 9 for its 2012 reporting ahead of its effectivity date on January 1, 2015 and therefore the consolidated financial statements as of December 31, 2012 and 2011 do not reflect the impact of the said standard. Based on this evaluation, loans and receivables and other financial liabilities, both carried at amortized cost, and investments held for trading and available for sale investments, both carried at fair value, will not be significantly affected. Upon adoption, these financial instruments shall continue to be carried at amortized cost and fair value, thus, has no impact to the Companys financial position and performance. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Companys financial assets, but will potentially have no impact on the classification and measurement of financial liabilities. The Company shall conduct another impact assessment early in 2013 using the consolidated financial statements as of and for the year ended December 31, 2012. Given the amendments on PFRS 9, the Company at present, does not plan to early adopt in its 2013 financial reporting. It plans to reassess its current position once the phases of PFRS 9 on impairment and hedge accounting become effective. The Companys decision whether to early adopt PFRS 9 for its 2013 financial reporting will be disclosed in its consolidated financial statements as of and for the year ending December 31, 2013. Should the Company decide to early adopt the said standard for its 2013 financial reporting, its interim consolidated financial statements as of and for the period ending March 31, 2013 will reflect application of the requirement under the said standard and will contain the qualitative and quantitative discussions of the results of the Companys impact evaluation. PFRS 10, Consolidated Financial Statements and PAS 27, Separate Financial Statements, will become effective for annual periods beginning on or after January 1, 2013. PFRS 10 replaces the portion of PAS 27 that addresses the accounting for consolidated financial statements. It also includes the issues raised in Philippine Interpretation Standing Interpretations Committee (SIC) - 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. As a consequence, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities and associates in the separate financial statements. PFRS 11, Joint Arrangements and PAS 28, Investments in Associates and Joint Ventures, will become effective for annual periods beginning on or after January 1, 2013. PFRS 11 replaces PAS 31, Interests in Joint Ventures and Philippine Interpretation SIC-13, Jointly Controlled Entities Non-monetary Contributions by Venturers. The new standard focuses on the nature of the rights and obligations arising from the arrangement. It removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. As a consequence, PAS 28 was amended and renamed as PAS 28, Investments in Associates and Joint Ventures, to describe the application of the equity method to investments in joint ventures in addition to associates. PFRS 12, Disclosure of Interests in Other Entities, will become effective for annual periods beginning on or after January 1, 2013. PFRS 12 includes all of the disclosures related to consolidated financial statements that were previously in PAS 27, as well as all the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required.

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PFRS 13, Fair Value Measurement, will become effective for annual periods beginning on or after January 1, 2013. PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. The adoption of this interpretation will result to a change in the revenue and cost recognition from percentage of completion method to completed contract method. The Company has made an assessment and is continuously monitoring the impact of this new interpretation to its consolidated financial statements. Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, will become effective for annual periods beginning on or after January 1, 2013. This interpretation applies to waste removal (stripping) costs incurred in surface mining activity, during the production phase of the mine (production stripping cost). If the benefit from the stripping activity will be realized in the current period, an entity is required to account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore, the entity should recognize these costs as a non-current asset, only if certain criteria are met (stripping activity asset). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amount less depreciation or amortization and less impairment losses, in the same way as the existing asset of which it is a part.

Annual Improvements to PFRS These improvements are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application of these improvements is permitted. The improvements listed below are not expected to have significant impact on the Companys consolidated financial statements: PAS 1, Presentation of Financial Statements - Clarification of the requirements for comparative information, clarifies the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. PAS 16, Property, Plant and Equipment - Classification of servicing equipment, clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. PAS 32, Financial Instruments: Presentation - Tax effect of distributions to holders of equity instruments, that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12. PAS 34, Interim Financial Reporting - Interim financial reporting and segment information for total assets and liabilities, clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entitys previous annual financial statements for that reportable segment. PFRS 1, First-time Adoption of PFRS - Borrowing Costs, clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs.

4.

Summary of Significant Accounting and Financial Reporting Policies Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisitions and are subject to an insignificant risk of change in value. Financial Assets Date of Recognition. The Company recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, is done using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the market place. Initial Recognition and Measurement. Financial assets are classified as financial assets at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity (HTM) investments, AFS investments as appropriate. The classification depends on the purpose for which the instruments were acquired and whether they are quoted in an active market. The Company determines the classification of its financial assets at initial recognition, and where allowed and appropriate, re-evaluates this classification at every balance sheet date. All financial assets are recognized initially at fair value plus, in the case of investments not at FVPL, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset. The Companys financial assets include cash and cash equivalents, receivables and advances, investments held for trading, AFS investments and cash in escrow under Deposits and Other Assets account. The Company has no HTM investments as of December 31, 2012 and 2011. Subsequent Measurement. The subsequent measurement of financial assets depends on their classification as follows: Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives, are also classified under financial asset at FVPL unless these are designated as hedging instruments in an effective hedge. Financial assets at FVPL are carried in the consolidated balance sheet at fair value with changes in fair value recognized in the Mark-to-market gains on investments held for trading account in the consolidated statement of income. Interest earned is recorded as interest income while dividend income is recorded as income when the right to receive payments has been established. This category includes investments held for trading (see Note 8).

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Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest method (EIR), less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortization as well as the losses arising from impairment is included in the Interest income account in the consolidated statement of income. Loans and receivables are included in current assets if maturity is within 12 months from the balance sheet date. Otherwise, these are classified as noncurrent assets. This category includes cash and cash equivalents, receivables and advances and cash in escrow under Deposits and Other Assets account (see Notes 6, 7 and 14). AFS Investments. AFS investments are nonderivative financial assets that are designated in this category or are not classified in any of the other categories. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions and business strategy. Subsequent to initial recognition, AFS investments are carried at fair value in the consolidated balance sheet. Changes in the fair value of such assets are reported as unrealized mark-tomarket gain or loss on AFS investments recognized as other comprehensive income in the consolidated statement of comprehensive income until the investment is derecognized or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in the consolidated statement of comprehensive income is transferred to the consolidated statement of income. When the fair value of the AFS investments cannot be measured reliably because of lack of reliable estimation of future cash flows and discount rates necessary to calculate the fair value of computed equity instruments, these investments are carried at cost less allowance for impairment losses. Assets under this category are classified as current assets if management intends to sell these financial assets within 12 months from balance sheet date. Otherwise, these are classified as noncurrent assets. This category includes investments in listed and unlisted equity securities (see Note 9). Day 1 Difference. Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 difference) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where unobservable data is used, the difference between the transaction price and model value is recognized in the consolidated statement of income only when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the Day 1 difference amount. Fair Value of Financial Instruments The fair value of financial instruments that are traded in active markets at each balance sheet date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs at the close of business on the balance sheet date. When current bid prices and asking prices are not available, the prices of the most recent transaction provide evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include using recent arms length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 25. Embedded Derivatives An embedded derivative is a component of a hybrid (combined) instrument that also includes a nonderivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative is separated from the host contract and accounted for as derivative if all the following conditions are met: (a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of the derivative; and (c) the hybrid or combined instrument is not measured at FVPL. The Company assesses whether embedded derivatives are required to be separated from host contracts when the Company first becomes party to the contract. Re-assessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Derecognition of Financial Assets A financial asset (or, when applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or the Company has transferred its rights to receive cash flows from the asset and either: (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Companys continuing involvement in the asset. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. Impairment of Financial Assets The Company assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial assets original effective interest rate (i.e., the effective interest rate computed at initial recognition). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognized in the consolidated statement of income. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are no longer included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the consolidated statement of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans, together with the associated allowance, are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Company. If a future write-off is later recovered, the recovery is recognized in the consolidated statement of income under Forfeired deposits and other income - net account. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income under Provision for (reversal of) impairment losses account, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

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Assets Carried at Cost. If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS Investments. In the case of equity instruments classified as AFS investments, evidence of impairment would include a significant or prolonged decline in fair value of investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of comprehensive income - is removed from the consolidated statement of comprehensive income and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in fair value after impairment are recognized directly in the consolidated statement of comprehensive income. Financial Liabilities Initial Recognition and Measurement. Financial liabilities are classified as financial liabilities at FVPL or other liabilities at amortized costs, as appropriate. The Company determines the classification of its financial liabilities at initial recognition, and where allowed and appropriate, re-evaluates this classification at every balance sheet date. All financial liabilities are recognized initially at fair value and in the case of other liabilities at amortized costs, plus directly attributable transaction costs. The Company has no financial liabilities classified as financial liabilities at FVPL and derivatives designated as hedging instruments in an effective hedge. Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations and borrowings. Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the EIR method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses are recognized in the consolidated statement of income when the liabilities are derecognized as well as through the EIR amortization process. This category includes loans payable, accounts payable and other liabilities and dividends payable (see Notes 15 and 16). Derecognition. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income. Classification of Financial Instruments Between Liability and Equity A financial instrument is classified as liability if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Company; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated balance sheet. Advances to contractors Advances to contractors, which are included as part of Receivables and Advances account, are carried at cost. These represent advance payments to contractors for the construction and development of the projects. Advances to contractors are recouped upon every progress billing payment depending on the percentage of accomplishment. Condominium Units for Sale and Land and Development Condominium units for sale and land and development are stated at the lower of cost and net realizable value. Net realizable value is the selling price in the ordinary course of business, less costs of completion and the estimated cost to make the sale. Land and development includes properties held for future development and properties being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation. Cost incurred for the development and improvement of the properties includes the following: Land cost; Amounts paid to contractors for construction and development; and Borrowing costs, planning and design costs, costs of site preparation, professional fees, property transfer taxes, construction overheads and other related costs.

Advances for Project Development Advances for project development represent advances made for the purchase of land and is stated initially at cost. Cost also includes interest on borrowed funds incurred for the advances. Advances for project development are subsequently measured at cost, net of any impairment. Property Acquisitions and Business Combinations When property is acquired, through corporate acquisitions or otherwise, management considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents an acquisition of a business. When such an acquisition is not judged to be an acquisition of a business, it is not treated as a business combination. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred tax arises. Otherwise, the acquisition is accounted for as a business combination. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Company measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition costs incurred are expensed and included in the operating expenses. When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the Companys previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

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Any contingent consideration to be transferred by the Company will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it should not be measured until it is finally settled within equity. Investment Property Investment property, which consists of commercial spaces in certain condominium projects, is measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment loss. Depreciation is calculated on a straight-line basis over 20 years. The residual values, useful life and method of depreciation are reviewed and adjusted, if appropriate, at each financial year-end. Transfers are made to or from investment property only when there is a change in use. For a transfer from inventory and owner occupied property to investment property, the cost of property for subsequent accounting is the carrying value of the investment property at the date of change in use. If owner occupied property becomes an investment property, the Company accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use. Investment property is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in the consolidated statement of income in the period of derecognition. Property and Equipment Property and equipment are stated at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and impairment in value, if any. Such cost includes the cost of replacing part of such property and equipment when that cost is incurred if the recognition criteria are met. The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs necessary in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and interest incurred during the construction period on funds borrowed to finance the construction of the projects. When each major repair is performed, its cost is recognized in the carrying amount of property and equipment as a replacement if the recognition criteria are satisfied. Expenditures incurred after the item has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period such costs are incurred. In situations where it can be clearly demonstrated that the expenditures have improved the condition of the asset beyond the originally assessed standard of performance, the expenditures are capitalized as additional cost of property and equipment. Depreciation is calculated on a straight-line basis over the following estimated useful lives of the assets: Building and improvements Machinery and office equipment Data processing equipment Office furniture and fixtures Leasehold improvements Transportation and other equipment 10 years 10 years 5 years 5 years 5 years 5 years

The assets residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at each reporting period. When each major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization are credited or charged to current operations. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized. Deposits Deposits represent advances made for acquisitions of property for future development and of shares of stocks. The Company determines whether the acquisitions represents an acquisition of a business or a purchase of an asset at the time the transfer of ownership is made. This account also includes deposits made for rent and utilities which are expected to be applied at the end of the term. Prepaid Expenses Prepaid expenses, included under Deposits and Other Assets account, are carried at cost less amortized portion. These include prepayments for taxes and licenses, rent, advertising and promotions and insurance. Investment in Associate The Companys investment in an associate, included under Deposit and Other Assets account, is accounted for under the equity method of accounting. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, investment in an associate is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Companys share in the net asset of the associate. The consolidated statement of income reflects the share in the result of operations of the associate. Where there has been a change recognized directly in the equity of the associate, the Company recognizes its share in any changes and discloses this, when applicable, in the consolidated statement comprehensive income. Profit and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate. After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the Companys net investment in the associate. An investment in associate is accounted for using the equity method from the date when it becomes an associate. On acquisition of the investment, any difference between the cost of the investment and the investors share in the net fair value of the associates identifiable assets, liabilities and contingent liabilities is accounted for as follow: a. b. Goodwill relating to an associate is included in the carrying amount of the investment. However, amortization of that goodwill is not permitted and is therefore not included in the determination of the Companys share in the associates profits or losses. Any excess of the Companys share in the net fair value of the associates identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the Companys share in the associates profit or loss in the period in which the investment is acquired.

The Company discontinues the use of equity method from the date when it ceases to have significant influence over an associate and accounts for the investment in accordance with PAS39 from that date, provided the associate does not become a subsidiary or a joint venture as defined in PAS 31. Upon loss of significant influence over the associate, the Company measures and recognizes any remaining investment at its fair value. Any difference in the carrying amount of the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognized in consolidated statement of income. When the Companys interest in an investment in associate is reduced to zero, additional losses are provided only to the extent that the Company has incurred obligations or made payments on behalf of the associate to satisfy obligations of the investee that the Company has guaranteed or otherwise committed. If the associate subsequently reports profits, the Company resumes recognizing its share of the profits if it equals the share of net losses not recognized.

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The financial statements of the associate are prepared for the same reporting period as the Parent Company. The accounting policies of the associate conform to those used by the Company for like transactions and events in similar circumstances. Interests in Joint Venture The Company has interests in jointly controlled operations (see Note 11). The Company recognized in the accompanying consolidated financial statements the assets that it controls, the liabilities and expenses that it incurs, and its share in the income that it earns from the sale of real estate by the joint venture. Impairment of Nonfinancial Assets The Company assesses at each balance sheet date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the assets recoverable amount. An assets recoverable amount is the higher of an assets or cash-generating units fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each balance sheet date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income. After such a reversal, the depreciation and amortization is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Customers Deposits Customers deposits mainly represent reservation fees and advance payments. These deposits will be recognized as revenue in the consolidated statement of income as the related obligations to the real estate buyers are fulfilled. Equity Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are deducted from proceeds, net of tax. Proceeds and/or fair value of considerations received in excess of par value, if any, are recognized as additional paid-in capital. Revenue and Cost Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue and cost are recognized: Real Estate Sales. The Company assesses whether it is probable that the economic benefits will flow to the Company when the contract price is collectible. Collectability of the contract price is demonstrated by the buyers commitment to pay, which is supported by the buyers initial and continuous investments that motivates the buyer to honor its obligation. Collectability is also assessed by considering factors such as collections and credit standing of the buyer. Revenue from sales of completed real estate projects is accounted for using the full accrual method. In accordance with Philippine Interpretations Committee Q&A No. 2006-01, the percentage-of-completion method is used to recognize income from sales of projects where the Company has material obligations under the sales contract to complete the project after the property is sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary stage (i.e., engineering, design work, construction contracts execution, site clearance and preparation, excavation and the building foundation are finished), and the costs incurred or to be incurred can be measured reliably. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated completion of a physical proportion of the contract work. Any excess of collections over the recognized receivables are included in the Customers deposits account in the consolidated balance sheet. If any of the criteria under the full accrual or percentage-of-completion method is not met, the deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers are presented under the Customers deposits account in the consolidated balance sheet. Cost of real estate sales is recognized consistent with the revenue recognition method applied. Cost of condominium units sold before the completion of the development is determined on the basis of the acquisition cost of the land plus its full development costs, which include estimated costs for future development works. The cost of inventory recognized in the consolidated statement of income upon sale is determined with reference to the specific costs incurred on the property, allocated to saleable area based on relative size and takes into account the percentage of completion used for revenue recognition purposes. Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceed total contract revenue. Changes in the estimated cost to complete the condominium project which affects cost of real estate sold and gross profit are recognized in the year in which changes are determined. For income tax purposes, full recognition is applied when more than 25% of the selling price has been collected in the year of sale. Otherwise, the installment method is applied. Gain on Sale of Investments. Revenue is recognized upon delivery of the securities to and confirmation of the sale by the broker. Interest. Revenue is recognized as the interest accrues taking into account the effective yield on the asset. Dividends. Dividend income is recognized when the shareholders right to receive the payment is established. Management Fee. Revenue is recognized when services have been rendered. Other Income: Rent. Rent income is recognized on a straight-line basis over the terms of the lease agreements. Forfeited Deposits. Deposits for reservation fee and installment payments made by the buyers on their purchase of condominium units are generally nonrefundable. When the contracts to sell or reservation agreement between the buyer and the Company are terminated, the reservation fee and installment payments received, to the extent of Republic Act 6552, Realty Installment Buyer Protection Act, is recognized as income.

Operating and Other Expenses Operating and other expenses are recognized as incurred. Pension Expense The Company is a participant to the SM Corporate and Management Companies Multi-Group Pension Plan. The Plan is a funded, noncontributory defined benefit pension plan administered by a Board of Trustees covering all of its regular full-time employees. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees projected salaries. Pension expense includes current service cost, interest cost, expected return on plan assets, amortization of unrecognized past service costs, recognition of actuarial gains (losses) and effect of any curtailments or settlements. Past service cost is amortized over a period until the benefits become vested. The portion of the actuarial gains and losses is recognized when it exceeds the corridor (10% of the greater of the present value of obligation or market related value of the plan assets) at the previous balance sheet date, divided by the expected average remaining working lives of active plan members. The defined benefit liability is the aggregate of the present value of the defined benefit obligation at balance sheet date and any actuarial gains and losses not recognized, reduced by past service cost not yet recognized and the fair value at balance sheet date of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits availed in the form of refund from the plan or reductions in the future contributions to the plan.

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

39

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately. Operating Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Company as Lessor. Leases where the Company does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rent income which is recognized in the consolidated statement of income. Contingent rents are recognized as revenue in the period in which they are earned. Company as Lessee. Leases which do not transfer to the Company substantially all the risks and benefits of ownership of the asset are classified as operating lease. Operating lease payments are recognized as expense in the consolidated statement of income on a straight-line basis over the lease term or based on the terms of the lease, as applicable. Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. Borrowing costs are capitalized when it is probable that they will result in future economic benefits to the Company. All other borrowing costs are expensed in the period they are incurred. Borrowing costs consist of interest, debt issue cost and other costs that the Company incurs in connection with the borrowing of funds. Debt issue costs are deferred and amortized using the EIR method over the term of the loans. For borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowings is used. Taxes Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date. Deferred Tax. Deferred tax is provided using the balance sheet liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss; and in respect of taxable temporary differences associated with investments in subsidiaries and associates and interest in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of excess minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences, and the carryforward benefits of excess MCIT over RCIT and NOLCO can be utilized except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries and associates and interest in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable income will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax relating to items recognized outside the consolidated statement of income is recognized outside the consolidated statement of income. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same tax authority. Value-added Tax (VAT). Revenue, expenses, assets and liabilities are recognized net of the amount of VAT, except: where the VAT incurred on a purchase of assets or services is not recoverable from the tax authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the tax authority is included as part of Deposits and Other Assets or Accounts payable and other liabilities accounts, respectively, in the consolidated balance sheet. Provisions Provisions, if any, are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. Earnings Per Share (EPS) EPS are computed based on the weighted average number of issued and outstanding shares of stock during the year, retroactively adjusted for stock dividends declared in the current year, if any. Diluted EPS is calculated in the same manner, adjusted for the dilutive effect of any potential common shares. As the Company has no dilutive potential common shares outstanding, basic and diluted EPS are the same. Business Segments For management purposes, the Company is organized into two operating businesses, namely, real estate development and investments in various securities. These divisions are the basis upon which the Company reports its segment information presented in Note 23 to the consolidated financial statements.

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SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

Events After the Reporting Period Post year-end events that provide additional information about the Companys financial position at the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

5.

Significant Accounting Judgments, Estimates and Assumptions The Companys consolidated financial statements require management to make judgments, estimates and assumptions that affect amounts reported in the consolidated financial statements and related notes. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effect of any change in judgments, estimates and assumptions are reflected in the consolidated financial statements as they become reasonably determinable. Judgments, estimates and assumptions are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments In the process of applying the Companys accounting policies, management has made certain judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements. Revenue Recognition Selecting an appropriate revenue recognition method for a particular real estate sale transaction requires certain judgments based on the buyers commitment on the sale which may be ascertained through the significance of the buyers initial investment and completion of development. The buyers commitment is evaluated based on collections, credit standing and location of the property. Completion of development is determined based on engineers judgments and estimates on the physical portion of contract work done and the completion of development beyond the preliminary stage. Property Acquisition and Business Combination The Company acquires subsidiaries which own real estate. At the time of acquisition, the Company considers whether the acquisition represents an acquisition of a business or a group of assets and liabilities. The Company accounts for an acquisition as a business combination if it acquires an integrated set of business processes in addition to the real estate property. The consideration is made to the extent that the significant business processes are acquired and the additional services to be provided by the subsidiary. When the acquisition of subsidiary does not constitute a business, it is accounted for as an acquisition of a group of assets and liabilities. The purchase price of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values at the date of acquisition, no goodwill or deferred tax is recognized. Classification of Property The Company determines whether a property is classified as investment property or land and development as follows: Investment property comprises building spaces and improvements which are not occupied for use by, or in the operations of, the Company, nor for sale in the ordinary course of business, but are held primarily to earn rental income and capital appreciation. Inventory comprises property that is held for sale in the ordinary course of business in which the Company develops and intends to sell on or before completion of construction. Distinction between Land and Development, Investment Properties and Property and Equipment The Company determines whether a property qualifies as land and development. In making this judgment, the Company considers whether the property will be sold in the ordinary course of business or is part of the Companys strategic landbanking activities which will be developed for sale as condominium residential projects. For investment properties, the Company considers whether the property generates cash flows largely independent of the other assets and is held primarily to earn rentals or capital appreciation. Property and Equipment is held for use in the supply of goods or services or for administrative purposes. The Company considers each property separately in making its judgment. Operating Leases - Company as Lessor The Company has entered into commercial property lease on its investment property. The Company determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of the investment property, thus the lease is accounted for as an operating lease. Operating Leases - Company as Lessee The Company has entered into commercial property leases related to its office spaces. The Company has determined that the significant risks and rewards of ownership of these properties were not transferred to the Company. Accordingly, these are accounted for as operating leases. Contingencies The Company is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The outcome of these legal proceeding are not presently determinable. In the opinion of management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will not have a material or adverse effect on the Companys financial position and results of operations.

Estimates and Assumptions The key estimates and assumptions concerning the future and other key sources of estimation uncertainty at balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revenue and Cost Recognition The Companys revenue recognition policies require management to make use of estimates and assumptions that may affect the reported amounts of revenues and costs. The Companys revenue from real estate and construction contracts recognized based on the percentage of completion are measured principally on the basis of the estimated completion of a physical proportion of the contract work. Allowance for Doubtful Accounts The Company assesses whether objective evidence of impairment exists for receivables that are individually significant, and collectively for receivables that are not individually significant. For the individually significant accounts, impairment is assessed by specific evaluation of information available for certain customers that are unable to meet their financial obligations. In these cases, management uses judgment, based on the best available facts and circumstances, including but not limited to, the length of relationship with the customer and the customers current credit status, to record specific allowance for customers against amounts due to reduce the receivable amount to expected collection. The specific allowance is re-evaluated and adjusted as additional information received affects the amounts estimated. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, past-due status and term. Allowance for doubtful accounts is maintained at a level considered adequate to provide for potentially uncollectible receivables.

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ANNUAL REPORT 2012

41

Receivables and advances amounted to P26,539.2 million and P16,193.1 million as of December31, 2012 and 2011, respectively. Provision for doubtful accounts amounted to P107.2 million and P80.6 million in 2012 and 2011, respectively. There was no provision for doubtful accounts in 2010 (see Note 7). Net Realizable Value of Condominium Units for Sale and Land and Development The Company writes down the carrying value of condominium units held for sale and land and development cost when the net realizable value becomes lower than the carrying value due to changes in market prices or other causes. The net realizable value of properties under construction is assessed with reference to market price at the balance sheet date for similar completed property, less estimated cost to complete the construction and estimated cost to sell. The carrying value is reviewed regularly for any decline in value. The carrying values of condominium units for sale and land and development amounted to P1,857.0 million and P29,106.8 million, respectively, as of December31, 2012, and P572.0 million and P19,801.4 million, respectively, as of December31, 2011 (see Note 10). Impairment of AFS Investments In making a judgment on whether an investment is impaired, the Company evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. The Company treats AFS investments as impaired when there has been a significant or prolonged decline in the fair value below its costs or where there are objective evidence that impairment exists. The determination of what is significant or prolonged requires judgment. The Company treats significant generally as 20% or more of the original cost of investment, and prolonged as period longer than 12 months. The Company evaluates other factors including normal volatility in share prices for quoted securities and the future cash flows and discounted factors for unquoted securities. If assumptions are made regarding the duration and extent to which the fair value is less than cost, the Company would suffer an additional loss representing the write down of cost to its fair value. The carrying amount of AFS investments amounted to P4,974.3 million and P4,727.1 million as of December 31, 2012 and 2011, respectively. In 2010, the Company recognized impairment loss on certain AFS investments amounting to P32.6 million (see Note 9). There were no provisions for impairment loss in 2012 and 2011. Estimated Useful Lives of Investment Property and Property and Equipment The useful life of each of the Companys investment property and property and equipment is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any investment property and property and equipment would increase the recorded operating expenses and decrease the investment property and property and equipment. There were no changes in the estimated useful lives of the Companys investment property and property and equipment in 2012 and 2011. Impairment of Investment Property and Property and Equipment The Company assesses at each balance sheet date whether there is an indication that the investment property and property and equipment may be impaired. If any such indication exists, the Company makes an estimate of the assets recoverable amount. An assets recoverable amount is the higher of an assets or cash-generating units fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amount of investment property amounted to P734.7 million and P707.3 million as of December 31, 2012 and 2011, respectively (see Note 12). The carrying amount of property and equipment amounted to P458.0 million and P244.5 million as of December 31, 2012 and 2011, respectively (see Note 13). There were no provisions for impairment loss in 2012, 2011 and 2010. Assumptions on Pension Expense The present value of the pension liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost for pension includes discount rate, expected rate of return on plan assets and salary projection rate. The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Company considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The assumption on the expected rate of return on plan assets is determined on a uniform basis, taking into consideration the future estimates of long-term investment returns. Other key assumptions for pension obligations are based in part on current market conditions. While it is believed that the Companys assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Companys pension asset. The assumptions used are disclosed in Note 20. Pension asset amounted to P16.3 million and P10.1 million as of December 31, 2012 and 2011, respectively. Unrecognized net actuarial loss amounted to P15.7 million and P15.9 million as of December 31, 2012 and 2011, respectively (see Note 20). Realizability of Deferred Tax Assets The Companys assessment on the recognition of deferred tax assets on deductible temporary differences is based on the projected taxable income in the following periods. Based on the projection, not all temporary differences will be realized, therefore, only a portion of deferred tax assets was recognized. The carrying amount of deferred tax assets amounted to P279.5 million and P126.5 million as of December 31, 2012 and 2011, respectively. No deferred tax assets were recognized on temporary differences amounting to P10.3 million and P9.3 million as of December31, 2012 and 2011, respectively (see Note 21). Fair Value of Financial Assets and Liabilities The Company carries certain financial assets and liabilities at fair value in the consolidated balance sheet. Determining the fair value of financial assets and liabilities requires extensive use of accounting estimates and judgment. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates). However, the amount of changes in fair value would differ if the Company utilized different valuation methodologies and assumptions. Any change in the fair value of these financial assets and liabilities would affect profit and loss and other comprehensive income.

Where the fair values of certain financial assets and financial liabilities recorded in the consolidated balance sheet cannot be derived from active markets, these are determined using internal valuation techniques using generally accepted market valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. The methods and assumptions used to estimate fair value of financial assets and liabilities are discussed in Note 25.

42
6.

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

Cash and Cash Equivalents This account consists of: Cash on hand and in banks (see Note 19) Temporary investments (see Note 19) 2012 P198,892,236 7,978,074,447 P8,176,966,683 2011 P214,763,604 5,698,411,887 P5,913,175,491

Cash in banks earn interest at the respective bank deposit rates. Temporary investments are made for three months or less depending on the immediate cash requirements of the Company, and earn interest at the respective temporary investment rates. Interest income earned amounted to P199.6 million in 2012, P252.8 million in 2011 and P158.9 million in 2010.

7.

Receivables and Advances This account consists of: Sale of real estate Advances to contractors Advances to related parties (see Note 19) Others Allowance for doubtful accounts 2012 P22,292,671,121 3,374,278,560 842,894,782 217,123,686 26,726,968,149 187,778,864 P26,539,189,285 2011 P12,978,862,056 3,024,120,921 180,213,052 90,447,497 16,273,643,526 80,572,082 P16,193,071,444

Receivable from sale of real estate is collectible in monthly installments. Accounts under in-house financing are subject to interest with market rates ranging from 13% to 18% per annum. Interest income earned amounted to P72.8 million in 2012, P84.1 million in 2011 and P70.4 million in 2010. Titles to condominium properties are not transferred to the buyers until full payment is made. The Companys assigned receivables from sale of real estate on a without recourse basis to local banks amounted to P1,975.4 million and P2,428.3 million as of December 31, 2012 and 2011, respectively (see Note 19). As of December 31, 2012, the Company also assigned receivables from sale of real estate on a with recourse basis to a local bank amounting to P19.0 million. There were no assignments of receivables from sale of real estate on with recourse basis in 2011. The cost of financing of receivables recorded under Interest expense account amounted to P96.7 million in 2012, P278.9 million in 2011 and P131.7 million in 2010. Advances to contractors are noninterest-bearing and are recouped upon every progress billing payment depending on the percentage of accomplishment. Other receivables consist of interest, dividends and receivable from tenants which are expected to be collected within the next financial year. The terms and conditions for advances to related parties are discussed in Note 19.

In 2012 and 2011, the Company provided an allowance for doubtful accounts on certain receivables arising from sale of real estate. The movements in the allowance for doubtful accounts are as follows: At beginning of year Provision for doubtful accounts At end of year 2012 P80,572,082 107,206,782 P187,778,864 2011 P 80,572,082 P80,572,082

8.

Investments Held for Trading This account consists of investments in listed common shares carried at fair value. The Company recognized mark-to-market gains on changes in fair value of the investments amounting to P195.5 million in 2012, P3.3 million in 2011 and P95.6 million in 2010. There were no investments sold in 2012 and 2011. The movements in this account are as follows: At beginning of year Mark-to-market gains on investments held for trading At end of year 2012 P384,002,340 195,474,558 P579,476,898 2011 P380,668,344 3,333,996 P384,002,340

9.

Available-for-Sale Investments This account consists of the following: Investments in shares of stock: Listed (see Note 19) Unlisted (see Note 19) 2012 P4,908,679,905 65,642,801 P4,974,322,706 2011 P4,661,488,961 65,642,801 P4,727,131,762

The movements in this account are as follows: At beginning of year Net change in fair value of AFS investments Additions (see Note 19) Disposals (see Note 19) At end of year 2012 P4,727,131,762 247,190,944 P4,974,322,706 2011 P3,933,064,434 465,357,690 435,637,673 (106,928,035) P4,727,131,762

SM DEVELOPMENT CORPORATION

ANNUAL REPORT 2012

43

Management intends to dispose these listed and unlisted AFS investments when the need arises. The costs of investments sold are determined using the weighted average method. In 2010, the Company recognized interest income amounting to P10.6 million from its investments in bonds which matured on September 8, 2010. In 2011 and 2010, a total of 50.1 million and 67.1 million shares with a total acquisition cost of P106.8 million and P158.3 million were sold resulting to a realized gain of P0.9 million and P349.4 million, respectively. Disposals in 2011 consist of listed shares while in 2010 are listed and unlisted shares. There were no disposals made in 2012. The movements in the Unrealized mark-to-market gain on available-for-sale investments account presented in the consolidated balance sheets are as follows: 2012 P2,641,754,870 247,190,944 247,190,944 P2,888,945,814 2011 P2,176,397,180 466,225,155 (867,465) 465,357,690 P2,641,754,870 2010 P630,230,853 1,525,748,167 (12,140,038) 32,558,198 1,546,166,327 P2,176,397,180

Balance at beginning of year Unrealized mark-to-market gain on AFS investments Transferred to profit and loss: Realized gain from sale of available-for-sale investments Impairment loss Balance at end of year

Impairment loss in 2010 on certain listed investments in shares of stock that were deemed to have a significant and prolonged decline in the fair values below its costs is charged to Forfeited deposits and other income - net account in the consolidated statements of income.

10. Condominium Units for Sale and Land and Development This account consists of the following: Condominium units for sale Land and development Condominium units for sale pertain to the completed projects of the Company. Land and development pertains to the Companys on-going residential condominium projects. Estimated cost to complete the projects amounted to P29,012.9 million and P30,587.9 million as of December 31, 2012 and 2011, respectively. The movements in Condominium Units for Sale account are as follows: At beginning of year Transfer from land and development Cost of real estate sold At end of year The movements in Land and Development account are as follows: At the beginning of year Land acquisitions Development cost incurred Borrowing cost capitalized (see Note 15) Cost of real estate sold Transfer to condominium units for sale Disposal of land (see Note 19) Reclassification to property and equipment (see Note 13) Reclassification to investment property (see Note 12) At end of year 2012 P19,801,431,718 7,444,570,355 16,647,683,184 615,278,138 (12,802,143,005) (2,017,843,207) (335,992,043) (171,675,817) (74,464,324) P29,106,844,999 2011 P16,679,705,330 4,369,143,480 7,979,077,817 334,042,438 (9,444,108,796) (116,428,551) P19,801,431,718 2012 P572,040,857 2,017,843,207 (732,840,222) P1,857,043,842 2011 P802,424,217 (230,383,360) P572,040,857 2012 P1,857,043,842 29,106,844,999 P30,963,888,841 2011 P572,040,857 19,801,431,718 P20,373,472,575

The Parent Company acquired LLCI, GLC, and MSDPC for P600.0 million, P1,500.0 million and P498.4 million, respectively, in 2012 and TTFOPI for P195.6 million in 2011 and became its wholly-owned subsidiaries. The purchase of these subsidiaries was accounted for as an acquisition of asset. At acquisition date, these subsidiaries own parcels of land which are to be developed into commercial/residential condominium projects. The condominium units for sale and land and development are stated at cost as of December 31, 2012 and 2011. There is no allowance for inventory write down as of December 31, 2012 and 2011.

11. Joint Venture Agreement (JVA) Government Service Insurance System (GSIS) On June 30, 2004, the Parent Company entered into a JVA with the GSIS for the development of a residential condominium project (the Project) on a parcel of land owned by GSIS. Under the JVA, GSIS shall contribute all its rights, title and interest in and to the Project. As consideration, GSIS shall receive the allocated units, which is 15% of the value of the total saleable units in the Project. In turn, the Parent Company shall provide financing for the implementation of the Project in consideration for 85% of the value of the total saleable units in the Project. On July 14, 2005, the Parent Company submitted to GSIS a Letter of Intent to change the GSIS property subject for development. On September 7, 2005, the GSIS Board of Trustees approved the proposal of the Parent Company to change the GSIS property subject for development. Under the amended JVA, the Property will now be 14,430 square meters, more or less, portion of the Tree Park Area of the GSIS-Baguio Convention Center. Under the amended JVA, in the event of a decrease in the investment commitment but not below the amount of P1,100.0million, there will be no adjustment in the sharing or allocation percentage of both parties as agreed upon based on the original JVA. In case the reduction goes lower than P1,100.0million, there shall be a corresponding adjustment in the sharing or allocation percentage of both parties, which shall be subject to the agreement of both parties. As of December 31, 2012, the development of the Project has not yet started.

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12. Investment Property This account consists of building spaces and improvements in the Mezza Residences and Berkeley Residences that are being leased to third and related parties. The movements in this account are as follows: Cost: 2012 P823,804,709 74,464,324 898,269,033 116,516,561 47,096,380 163,612,941 P734,656,092 2011 P822,318,102 1,486,607 823,804,709 75,351,795 41,164,766 116,516,561 P707,288,148

Balance at beginning of year Reclassification from land and development (see Note 10) Additions Balance at end of year Accumulated depreciation: Balance at beginning of year Depreciation Balance at end of year

The fair value of the investment property amounted P1,540.7 million as of December31, 2012 as determined by an independent appraiser. The fair value of investment property was estimated using the sales comparison approach. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms length transaction at the date of valuation. Rent income, included as part of Forfeited deposits and other income - net account in the consolidated statements of income, generated from the investment property amounted to P100.3 million, P74.2 million and P35.5 million in 2012, 2011 and 2010, respectively. Direct costs which consist of depreciation, utilities, janitorial and securities, repairs and maintenance amounted to P106.1 million in 2012, P85.7 million in 2011 and P41.2 million in 2010.

13. Property and Equipment This account consists of:


Machinery and Office Equipment P8,437,325 9,071,329 17,508,654 4,123,674 1,575,603 5,699,277 P11,809,377 Data Processing Equipment P34,854,033 20,948,928 55,802,961 10,958,895 8,546,245 19,505,140 P36,297,821 Office Furniture and Fixtures P13,622,942 57,393,558 71,016,500 6,573,821 5,100,065 11,673,886 P59,342,614 2011 2012 Transportation and Other Equipment P23,112,861 18,213,490 41,326,351 12,347,609 5,030,370 17,377,979 P23,948,372

Building & Improvements Cost Balance at beginning ofyear Additions Reclassifications (see Note 10) Balance at end of year Accumulated Depreciation Balance at beginning ofyear Additions Balance at end of year Net Book Value P6,027,018 6,027,018 3,434,636 307,143 3,741,779 P2,285,239

Leasehold Improvements P260,169,789 11,409,945 171,675,817 443,255,551 64,297,385 54,684,287 118,981,672 P324,273,879

Total P346,223,968 117,037,250 171,675,817 634,937,035 101,736,020 75,243,713 176,979,733 P457,957,302

Building & Improvements Cost Balance at beginning ofyear Additions Reclassifications (see Note 10) Balance at end of year Accumulated Depreciation Balance at beginning ofyear Additions Balance at end of year Net Book Value P4,518,089 1,508,929 6,027,018 3,242,833 191,803 3,434,636 P2,592,382

Machinery and Office Equipment P7,322,155 1,115,170 8,437,325 2,635,498 1,488,176 4,123,674 P4,313,651

Data Processing Equipment P21,169,126 13,684,907 34,854,033 5,609,540 5,349,355 10,958,895 P23,895,138

Office Furniture and Fixtures P13,455,670 167,272 13,622,942 4,368,515 2,205,306 6,573,821 P7,049,121

Leasehold Improvements P94,708,834 49,032,404 116,428,551 260,169,789 16,301,180 47,996,205 64,297,385 P195,872,404

Transportation and Other Equipment P21,058,614 2,054,247 23,112,861 8,939,819 3,407,790 12,347,609 P10,765,252

Total P162,232,488 67,562,929 116,428,551 346,223,968 41,097,385 60,638,635 101,736,020 P244,487,948

14. Deposit and Other assets This account consists of: Deposits Deferred Input tax Input tax Creditable withholding tax Cash in escrow (see Note 19) Prepaid expenses Pension asset (see Note 20) Advances to officers and employees Investment in shares of stocks of an associate Others 2012 P2,139,646,278 1,056,727,388 829,388,319 121,816,674 98,996,375 74,132,080 16,348,290 5,061,720 1,772,159 21,721,657 P4,365,610,940 2011 P1,163,065,506 130,767,682 370,142,349 61,087,753 2,193,231,515 154,388,290 10,130,207 13,684,503 18,769,235 18,821,960 P4,134,089,000

Deposits include advance payments amounting to P1,915.8 million and P836.7 million for land acquisitions as of December 31, 2012 and 2011, respectively. This account also includes construction bonds and rental deposits and deposits for utilities and advertisements. Deferred input tax pertains to the VAT on the purchase of parcels of land. Input tax represents VAT paid to suppliers that can be claimed as credit against the Companys future output VAT liabilities without prescription.

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Creditable withholding tax is the tax withheld by the withholding agents from payments to the Company which can be applied against the income tax payable. Cash in escrow pertains to the amounts deposited in the account of an escrow agent as required by the Housing and Land Use Regulatory Board (HLURB) in connection with the Companys temporary license to sell properties for specific projects prior to HLURBs issuance of a license to sell and certificate of registration. Under this temporary license to sell, all payments, inclusive of down payments, reservation and monthly amortization, among others, made by buyers within the selling period shall be deposited in the escrow account. Interest income earned from the cash in escrow account amounted to P80.3 million in 2012, P86.2 million in 2011 and P62.1 million in 2010. Prepaid expenses pertain mainly to prepaid rent, taxes and other expenses which are normally incurred within the next financial year. Advances to officers and employees are normally settled within the next financial year. In 2011, the Company acquired 49.0% ownership in Summerhills Home Development Corporation (SHDC) for a total consideration of P20.1 million. Consequently, SHDC became an associate of the Company. The movement in Investment in shares of stock of an associate account are as follows: Beginning balance Share in net losses of an associate Balance at end of year 2012 P18,769,235 (16,997,076) P1,772,159 2011 P20,054,293 (1,285,058) P18,769,235

Share in net losses of an associate is included as part of Forfeited deposits and other income - net account in the consolidated statements of income. Financial information of the Companys associate follows: Total assets Total liabilities Net loss 15. Loans Payable This account consists of: Short-term loans Long-term loans: Fixed rate corporate notes (see Note 19) Long-term bank loan Less unamortized debt issue costs 2012 P6,500,000,000 16,313,000,000 2,000,000,000 18,313,000,000 99,223,079 18,213,776,921 P24,713,776,921 2011 P1,000,000,000 10,000,000,000 10,000,000,000 55,774,007 9,944,225,993 P10,944,225,993 2012 P354,234,600 351,945,887 34,687,910 2011 P48,345,188 10,297,715 2,622,567

The movements in the debt issue costs are as follows: Balance at beginning of year Additions Amortization Balance at end of year 2012 P55,774,007 65,793,602 (22,344,530) P99,223,079 2011 P75,510,118 (19,736,111) P55,774,007

Short-term loans This account consists of unsecured short-term loans from local banks obtained by the Company for working capital requirements with fixed interest rates of 4.3% to 5.0% per annum in 2012. Short-term loans in 2011 have fixed interest rate of 4.3% per annum. Interest expense on short-term loans amounted to P88.7 million in 2012, P6.3 million in 2011 and P70.8 million in 2010. Long-term loans a. Fixed rate corporate notes On April 27, 2012, the Parent Company issued peso-denominated fixed rate corporate notes amounting to P6,313.0 million. Of the total principal, P6.3 million shall be paid annually starting on April 27, 2013 up to April 27, 2017 and the remaining shall be paid on July 27, 2017. The notes have fixed interest rate of 6.0% payable semi-annually. On June 1, 2010, the Parent Company issued Series A and Series B peso-denominated fixed rate corporate notes amounting to P2,000.0 million and P8,000.0 million, respectively. The Series A and Series B notes have fixed interest rates of 6.8% and 7.7%, which are payable semi-annually, and with maturity dates of June 1, 2013 and June 2, 2015, respectively.

b.

Long-term bank loan On December 27, 2012, the Parent Company obtained a long-term bank loan amounting to P2,000.0 million from a local bank which will mature on December 23, 2015. The loan bears fixed interest rate at 4.7%, payable quarterly.

The Parent Company has an option to prepay the corporate notes subject to a fixed prepayment penalty. The prepaid amount shall include the outstanding principal obligation, any accrued interest on the notes and the prepayment penalty. Notes facility agreements provide for certain restrictions and requirements principally with respect to maintenance of required financial ratios and material change in ownership or control. As of December 31, 2012 and 2011, the Parent Company is in compliance with the terms of its loan covenants. Interest expense on total long-term loans, before capitalization of borrowing cost, amounted to P1,084.4 million in 2012, P756.8 million in 2011 and P557.4 million in 2010. Amortization of debt issue costs amounting to P22.3 million in 2012, P19.7 million in 2011 and P11.5 million in 2010 is recognized under Interest expense account in the consolidated statements of income. Borrowing costs capitalized to land and development account amounted to P615.3 million, P334.0 million and P334.9 million in 2012, 2011 and 2010, respectively (see Note 10). The average rate used to determine the amount of borrowing costs eligible for capitalization is 6.9% in 2012, 7.5% in 2011 and 7.2% in 2010.

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16. Accounts Payable and Other Liabilities This account consists of: Trade Payable arising from acquisition of land Deferred output VAT Accrued expenses: Interest (see Note 19) Marketing and advertising Sales commission Rent (see Note 19) Others Withholding taxes payable Deferred rent income (see Note 19) Payable to related parties and others (see Note 19) 2012 P6,473,737,710 4,977,105,380 638,388,636 192,899,848 183,178,533 92,346,587 79,797,527 28,408,570 125,410,760 123,567,137 97,664,220 P13,012,504,908 2011 P2,104,763,383 1,811,424,758 718,528,675 65,371,869 152,855,217 6,717,181 6,759,317 36,851,866 143,567,137 63,039,791 P5,109,879,194

Trade payables consist mainly of liabilities to contractors and suppliers, which are noninterest-bearing and are normally settled within the next financial year. Payable arising from acquisition of land are due within one to three years. In 2012, certain payables arising from acquisition of land have terms three years and bears interest of 3.5% per annum on the outstanding balance. Amount shall be payable annually in three equal installments amounting to P423.7 million in 2013, 2014 and 2015, respectively. Interest expense amounted to P24.2 million in 2012. There were no interest expense recognized in 2011 and 2010. Payables arising from the acquisition of land as of December 31, 2011 are noninterest-bearing. Deferred output VAT represents output VAT on unpaid portion of recognized receivable from sale of real estate. This amount is reported as output VAT upon collection. Accrued expenses include accruals for interest, marketing and advertising, sales commission, rent and others which are expected to be settled within the next financial year. Withholding taxes payable are expected to be settled within the next financial year. Others include receivables assigned on a with recourse basis to a local bank amounting to P19.0 million as of December 31, 2012. The terms and conditions for deferred rent income and payable to related parties are discussed in Note 19.

17. Customers Deposits Customers deposits mainly represent excess of collections from buyers over the related revenue recognized based on the percentage of completion method. This account also includes nonrefundable reservation fees paid to the Company by prospective buyers which are to be applied against the receivable upon recognition of revenue. Forfeited customers deposits, except accounts covered by Republic Act 6552, Realty Installment Buyer Protection Act, amounting to P565.1 million, P107.9 million and P77.5 million in 2012, 2011 and 2010, respectively, are included as part of Forfeited deposits and other income - net account in the consolidated statements of income.

18. Equity Capital Stock The details and movements are as follows: Capital stock - P1 par value Balance at beginning of year Increase in authorized capital stock Stock dividends Issuance from stock rights - net of subscription receivables of 916,046,078 shares in 2010 Balance at end of year Authorized 2011 8,000,000,000 4,400,000,000 12,400,000,000 Number of Shares 2010 8,000,000,000 8,000,000,000 Issued and Subscribed 2011 6,412,322,543 1,100,000,000 916,046,078 8,428,368,621

2012 12,400,000,000 12,400,000,000

2012

2010

8,428,368,621 842,835,618 9,271,204,239

4,122,207,350 2,290,115,193 6,412,322,543

Below are the Parent Companys issuance of shares of stock approved by the SEC: Date of SEC Approval March 3, 1975 Exempt transaction Exempt transaction Type of Issuance Initial public offering Stock rights Stock rights No. of Shares Issued 35,000,000 1,374,069,116 1,832,092,155 Issue/Offer Price P1.00 3.50 6.38

The Parent Company has total number of shareholders of 2,810 and 2,832 as of December 31, 2012 and 2011, respectively. On April 26, 2011, the Parent Companys BOD and stockholders approved the increase in authorized capital stock from 8,000.0 million shares to 12,400.0 million shares at P1.00 par value per share. On June 2, 2011, the SEC approved the increase in authorized capital stock. The minimum subscription amounting to P1,100.0 million was settled by way of stock dividends of 1,100.0 million shares issued at par value. Stockholders on record as of June20,2011 were entitled to the stock dividends. The stock dividends were distributed and listed with the PSE on July 14, 2011.

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Below are the details of the Parent Companys stock rights offerings in 2010 and 2009: Date of BOD approval Offer period Common shares offered Price per share Pricing date Record date Completion date 2010 August 2, 2010 October 18 to 22, 2010 1,832,092,155 P6.38 September 20, 2010 October 6, 2010 May 2011 2009 September 8, 2009 January 4 to 8, 2010 1,374,069,116 P3.5 November 23, 2009 December 7, 2009 January 8, 2010

Additional Paid-in Capital (APIC) The stock rights offerings completed in 2010 resulted in APIC of P13,228.7 million. The subscription receivable relating to the 2010 stock rights offering was fully collected in 2011. Issuance costs for stock rights offerings amounted to P63.1 million in 2010. Retained Earnings The Companys retained earnings include the accumulated equity in net earnings of subsidiaries amounting to P385.3 million and P309.5 million as of December31, 2012 and 2011, respectively, which is not available for dividend declaration until such time that the subsidiaries declares the dividends. Also, the retained earnings includes mark-to-market gains on investments held for trading amounting to P327.4 million and P131.9 million as of December 31, 2012 and 2011, respectively. The Company has an existing appropriation of retained earnings for future development amounting to P6,000.0 million and P1,500.0 million as of December 31, 2012 and 2011, respectively, which are restricted as to dividend declaration. The portion of retained earnings appropriated will be utilized for the construction of condominium projects as approved by the BOD on February 21, 2012. These projects are expected to be completed in 2016 and 2017. Details of the Companys declaration of stock dividends are as follows: Date of BOD approval % of stock dividends declared per share Record date Distribution date 2012 April 25 10% May 25 June 21 2011 April 26 15% June 20 July 14

Details of the Companys declaration of cash dividends are as follows: Date of BOD approval Amount of cash dividends per share Record date Payment date 2012 April 25 P0.05 May 22 June 21 2011 April 26 P0.10 May 26 June 21 2010 April 26 P0.08 May 26 June 21

19. Related Party Transactions Parties are considered to be related if one party has the ability, directly and indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. This includes: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; and (c)individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual. In considering each related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Transactions with Related Parties The Company, in the normal course of business, has transactions with related parties. Significant transactions with related parties included in the consolidated financial statements are summarized below: Category Ultimate Parent and Parent Receivables/Advances Gain on disposal of land Rent expense/Payable Selling expense/Payable Associate Receivables/Advances Related Parties under common ownership - SMIC subsidiaries Management fee/Receivable Receivables/Advances Interest income Selling expense/Payable Rent income Year 2012 2011 2012 2012 2011 2010 2012 2011 2010 2012 2012 2011 2010 2012 2011 2012 2012 2011 2010 2012 2011 2010 Amount/ Volume P530,540,903 40,685,475 199,473,957 107,246,054 7,230,573 16,960,269 40,667,911 7,406,205 2,389,500 129,711,113 25,550,785 39,766,664 28,774,427 23,144,666 41,843,510 943,349 144,050,124 105,662,947 33,379,663 20,000,000 20,000,000 28,973,495 Outstanding Balance P530,804,296 263,393 79,797,527 36,945,911 37,591,195 10,520,000 129,711,113 103,106,378 77,555,593 37,788,929 79,232,344 102,377,010 11,290,261 3,131 123,567,137 143,567,137 172,540,632 Terms Due on demand Operating lease Noninterest-bearing Noninterest-bearing 15% of selling price of unit sold during the year Portion with 8% interest Noninterest-bearing Operating lease for 10 years Conditions Unsecured Unsecured Unsecured

Unsecured Unsecured Unsecured Unsecured

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Category Related Parties under common ownership - SMIC associates Cash, cash equivalents and cash in escrow Interest income Receivable financed Interest expense on receivable financing Loans payable Interest expense on loans Investment in HFT and AFS Dividend income Receivables/Advances Payables/Advances Other Related Parties Advances for project development

Year 2012 2011 2012 2011 2010 2012 2011 2012 2011 2010 2012 2011 2012 2011 2010 2012 2011 2012 2011 2010 2012 2011 2012 2011 2012 2011

Amount/ Volume P31,462,944 3,258,250,774 285,414,528 327,820,356 206,013,039 1,975,458,533 2,428,309,290 107,354,962 169,713,997 75,959,068 200,000,000 30,107,874 46,380,000 27,055,000 95,500 328,805,138 11,537,928 10,565,424 10,435,320 23,595 587,488 1,971,161,370 859,589

Outstanding Balance P8,106,971,755 8,075,508,811 200,000,000 400,000,000 2,983,663 3,865,033 3,865,033 4,892,353,096 4,628,920,773 40,651 17,056 587,488 587,488 3,089,143,327 1,117,981,957

Terms Interest bearing 0.5% to 3.5% Without recourse With 7.73% interest No maturity Noninterest-bearing Noninterest-bearing Noninterest-bearing

Conditions

Unsecured Unsecured Secured with AFS investment Unsecured Unsecured Unsecured Unsecured

There have been no guarantees provided or received for any related party receivables or payables. As of December 31, 2012 and 2011, the Company has not recorded any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken each financial year through examining the financial position of the related parties and the market in which these related parties operate. Significant transactions with related parties included in the financial statements follow: a. The Company holds certain bank accounts, temporary investments and cash in escrow which earn interest based on the prevailing market interest rates in Banco De Oro Unibank, Inc. (BDO) and China Banking Corporation (CBC). The Company entered into receivable financing arrangements with BDO. As of December 31, 2012 and 2011, financed receivables on a without recourse basis amounted to P338.5 million and P2,428.3 million, respectively. There were no assigned receivables on a with recourse basis in 2012 and 2011 (see Note 7). The Parent Company entered into receivable financing arrangements with CBC. As of December 31, 2012, financed receivables on a without recourse basis amounted to P1,636.9 million. There were no assigned receivables on a without recourse as of December 31, 2011. Also, there were no assigned receivables on a with recourse basis in 2012 and 2011 (see Note 7). In 1996, the Parent Company entered into a purchase agreement with SMIC to purchase a parcel of lot situated in Tagaytay City. The total consideration paid by the Parent Company, including directly related expenses, amounted to P336.0 million (see Note 10). In 2012, the Parent Company and SMIC rescinded the purchase agreement. The fair value of the land based on appraisal report upon rescission of the sale is P535.5 million. The difference in the fair value and cost of the land was recorded under Forfeited deposits and other income - net account. The Parent Company entered into a development agreement with Intercontinental Development Corporation, a company owned by the stockholders of the SM Group of Companies, whereby the Company will act as project manager and marketing arm for the development and sale of a residential project. In 2011, the Parent Company entered into a share swap transaction with Belle Corporation (Belle) wherein the Company transferred its investment in Premium Leisure Amusement, Inc. with carrying value of P0.1 million in exchange for 51,570,000 new common shares of Belle. The Company recognized P100.4 million gain on the share swap transaction. Also, the Company acquired, through exercise of stock rights, additional 111.7 million shares of Belle priced at P3.0 per share and with total purchase price of P335.1 million in 2011. The Advances for Project Development account includes advances made to a stockholder for the acquisition of land for future development. The Parent Company has lease agreements with Supervalue, Inc., for the lease of its investment property for a period of 10 years, commencing in March 2009 until February 2019. The Parent Company received the full consideration for the lease amounting to P200.0 million in 2009 (see Note 16). The future minimum rental receivables under noncancellable lease are as follows: Year Within one year Over one year but within 5 years Over five years but within 10 years g. h. Lease agreements include fixed and variable terms. In 2012, the Company entered into an agreement with SM Land for the lease of its office for 5 years with an option to renew. The Company previously leases from SMIC. The Company entered into an agreement with SM Prime for the lease of its booths and showrooms located in the malls with a lease term of 1 to 3 years and an option to renew. The Parent Company also has JVAs with the following subsidiaries: SMRC The Parent Company entered into a JVA with SMRC to develop certain properties of SMRC located at the Mall of Asia Complex into a commercial/residential condominium project. Under the agreement, the Parent Company will contribute the development cost while SMRC will contribute the land. The Parent Company and SMRC agreed to share on the gross proceeds from the sale of units on a percentage sharing method, respectively, among others. 2012 P20,000,000 80,000,000 23,567,137 2011 P20,000,000 80,000,000 43,567,137

b.

c. d.

e. f.

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The construction project was completed in 2012. Share in revenue of the joint venture amounted to P97.3 million in 2012, P209.0 million in 2011 and P236.9 million in 2010. Landfactors The Parent Company entered into a JVA with Landfactors to develop certain properties of Landfactors located in Mandaluyong City into a commercial/ residential condominium project. Under the agreement, the Parent Company will contribute the development cost while Landfactors will contribute the land. The Parent Company and Landfactors agreed to share on the gross proceeds from the sale of units on a percentage sharing method, among others. The total estimated project development costs amounted to P1,373.9 million. The construction project is expected to be completed in 2015. There is no revenue sharing yet from the joint venture as of December 31, 2012 and 2011. Total compensation paid to key management personnel representing short-term employee benefits amounted to P66.4 million, P60.5 million and P45.0 million in 2012, 2011 and 2010, respectively.

i.

20. Pension Plan The following tables summarize the components of pension expense recognized in the consolidated statements of income and the funded (unfunded) status and amounts recognized in the consolidated balance sheets for the pension asset. Pension Expense Current service cost Interest cost on benefit obligation Expected return on plan assets Net actuarial loss recognized Effect of asset limit Effect of curtailment Pension Asset Defined benefit obligation Fair value of plan assets Funded (unfunded) obligation Unrecognized net actuarial loss Effect of asset ceiling Pension asset The pension asset is included under Deposit and Other Assets account in the consolidated balance sheets. Changes in the present value of the defined benefit obligation are as follows: Defined benefit obligation, January1 Current service cost Actuarial losses on obligation Interest cost on benefit obligation Benefits paid from plan assets Transfer to the plan Curtailment gain Benefits paid from book reserve Defined benefit obligation, December31 Changes in the fair value of plan assets are as follows: Fair value of plan assets, January1 Contributions Actuarial gain Expected rate of return on plan assets Benefits paid from plan assets Transfer to the plan Fair value of plan assets, December31 Actual return on plan assets The following table presents the carrying amounts and estimated fair values of the plan assets: Carrying amount P3,986,329 7,205,727 25,885,067 2,156,161 25,783,241 499,158 P65,515,683 2012 Fair Value P3,986,329 7,205,727 25,885,067 2,156,161 25,783,241 499,158 P65,515,683 Carrying amount P2,630,115 2,783,033 11,926,157 1,556,943 16,896,202 299,227 P36,091,677 2011 Fair Value P2,630,115 2,783,033 11,926,157 1,556,943 16,896,202 299,227 P36,091,677 2012 P36,091,677 22,277,923 4,517,959 2,827,846 (431,032) 231,310 P65,515,683 P7,345,805 2011 P18,142,617 17,118,363 840,115 1,555,170 (1,564,588) P36,091,677 P2,395,285 2012 P41,826,136 13,653,062 6,598,837 2,948,636 (431,032) 231,310 P64,826,949 2011 P26,847,830 8,928,732 5,740,318 2,129,212 (1,564,588) (191,804) (63,564) P41,826,136 2012 (P64,826,949) 65,515,683 688,734 15,696,059 (36,503) P16,348,290 2011 (P41,826,136) 36,091,677 (5,734,459) 15,864,666 P10,130,207 2012 P13,653,062 2,948,636 (2,827,846) 2,274,741 39,819 P16,088,412 2011 P8,928,732 2,129,212 (1,555,170) 329,502 (105,049) (375,197) P9,352,030 2010 P8,499,428 2,774,355 (1,111,156) 43,972 3,675,258 P13,881,857

Cash and cash equivalents Investments in debt and other securities Investment in common trust funds Investments in equity securities Investment in government securities Others

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Cash and cash equivalents include regular savings and time deposits. Investments in debt and other securities consist of both short-term and long-term corporate loans, notes and bonds, which bears interest ranging from 5.5% to 8.5% and will mature on various dates starting April 2014 to September 2022. Investments in equity securities consist of listed and unlisted equity securities. Investments in government securities, consist of retail treasury bonds that bears interest ranging from 5.0% to 11.1% and will mature on various dates starting July 2013 to October 2037. Other assets pertain to accrued interest income on cash deposits and debt securities held by the Plan.

The following table summarizes the outstanding balances and transactions of the Plan with BDO as of December 31, 2012:

Account Cash and cash equivalents Interest income from cash and cash equivalents Investment in common trust funds Gain from investment in common trust funds The principal assumptions used in determining pension and benefit obligations of the pension plan are shown below: 2012 6% 6% 11%

Amount P3,986,329 56,244 25,855,067 5,777,206

Discount rate Expected rate of return on plan assets Salary projection rate

2011 7% 6% 10%

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled. The Company expects to contribute P26.9 million in 2013. Amounts for the current and previous four years are as follows: 2012 P64,826,949 65,515,683 688,734 1,244,101 4,517,959 2011 P41,826,136 36,091,677 (5,734,459) 1,636,942 840,115 2010 P26,847,830 18,142,617 (8,705,213) (993,749) 2,072,910 2009 P24,531,721 22,079,985 (2,451,736) 2,836,318 1,326,366 2008 P18,356,917 12,448,595 (5,908,322) 974,367 (1,242,145)

Defined benefit obligation Fair value of plan assets Excess (Deficit) Experience adjustments on defined benefit obligation Experience adjustments on plan assets 21. Income Tax

The components of the Companys deferred tax assets (liabilities) are as follows: Accrued marketing and rent expenses NOLCO Allowance for doubtful accounts MCIT Deferred rent income Unamortized past service cost Excess gross profit on sale of real estate Unrealized foreign exchange loss Unrealized gross profit on sale of real estate Capitalized borrowing costs Pension asset Unrealized foreign exchange gain 2012 P67,137,025 62,773,430 56,333,659 53,699,231 37,070,141 2,327,952 204,698 P279,546,136 (P362,733,217) (184,583,441) (4,904,487) (2,373,817) (P554,594,962) 2011 P45,856,565 24,171,625 11,757,325 43,070,141 1,640,921 P126,496,577 (P284,562,780) (100,212,731) (3,039,062) (P387,814,573)

Deferred tax assets on temporary differences and carryforward benefits of NOLCO of the subsidiaries, which were not recognized as it is not probable that taxable income will be sufficient against which they can be utilized, amounted to P10.3 million and P9.3 million as of December 2012 and 2011, respectively. The Company has available NOLCO which can be carried forward and applied against taxable income and MCIT which can be claimed as credit against the regular corporate income tax payable as follows: NOLCO Year incurred 2012 MCIT Year paid 2011 2012 Expiry 2015 Expiry 2014 2015 Amount P209,244,767 Amount P11,757,325 41,941,906 P53,699,231 Balance P209,244,767 Balance P11,757,325 41,941,906 P53,699,231

The current provision for income tax of the Parent Company represents MCIT in 2012 and 2011 and RCIT in 2010.

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The reconciliation of the applicable statutory income tax rates to the effective income tax rates is summarized as follows:

Statutory income tax rate Tax effects of: Availment of income tax holiday Interest income subjected to final tax Change in unrecognized deferred tax assets andothers Effective income tax rates 22. Basic/Diluted Earnings Per Share Net income (a) Common shares issued, after giving retroactive effect to stock dividend declared in 2012 and 2011 Weighted average number of shares issued through stock rights, after giving retroactive effect to stock dividend declared in 2012 and 2011 Weighted average number of common shares outstanding (b) Basic/diluted earnings per share (a/b) 23. Segment Information The Company conducts its business in the following segments: Investments in Various Securities Revenue Inter-segment revenue Total revenue Segment results: Income before income tax Provision for income tax Net income Segment assets Segment liabilities Net cash flows provided by (usedin): Operating activities Investing activities Financing activities Other information: Depreciation Other noncash income P229,388 P229,388 P229,388 P229,388 P5,553,800 P P 33,913 P 195,475 Investments in Various Securities Revenue Inter-segment revenue Total revenue Segment results: Income before income tax Provision for income tax Net income Segment assets Segment liabilities Net cash flows provided by (usedin): Operating activities Investing activities Financing activities Other information: Depreciation Other noncash income P134,005 P134,005 P133,205 P133,205 P5,111,134 P (P800) (198,038) P 97,132

2012 30.0% (25.9) (1.6) (0.8) 1.7%

2011 30.0% (28.1) (2.4) 0.1 (0.4%)

2010 30.0% (28.8) (1.6) 5.1 4.7%

2012 P4,904,417,976 9,271,204,239 9,271,204,239 P0.53

2011 P4,175,299,780 9,271,204,239 9,271,204,239 P0.45

2010 P3,021,680,152 5,215,045,741 2,052,217,073 7,267,262,814 P0.42

2012 Real Estate Development Eliminations (Amounts in Thousands) P22,926,359 71,010 P22,997,369 P4,761,221 86,191 P4,675,030 P77,925,906 P41,801,722 (P6,580,061) (342,369) 10,064,021 P122,340 2011 Real Estate Development Eliminations (Amounts in Thousands) P16,875,257 94,207 P16,969,464 P4,024,976 (17,119) P4,042,095 P51,979,251 P20,679,837 (P4,399,893) (985,265) 6,235,652 P101,803 P (94,207) (P94,207) P P (P3,165,604) (P2,163,090) (P2,306,923) (1,159,954) P Consolidated P17,009,262 P17,009,262 P4,158,181 (17,119) P4,175,300 P53,924,781 P18,516,747 (P6,707,616) (1,183,303) 5,075,698 P101,803 97,132 P (71,010) (P71,010) P P (P3,281,858) (P1,742,098) (P3,015,416) 2,095,791 P Consolidated P23,155,747 P23,155,747 P4,990,609 86,191 P4,904,418 P80,197,848 P40,059,624 (P9,595,477) (308,456) 12,159,812 P122,340 195,475

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Investments in Various Securities Revenue Inter-segment revenue Total revenue Segment results: Income before income tax Provision for income tax Net income Segment assets Segment liabilities Net cash flows provided by (usedin): Operating activities Investing activities Financing activities Other information: Depreciation Other noncash income The following table shows the reconciliation of total revenue: Revenue from real estate sales Interest income Mark-to-market gains on investments held for trading Dividend income Management fee Gain on sale of investments held for trading and AFS investments Others P1,062,870 P1,062,870 P1,002,644 P1,002,644 P13,252,324 P23,747 (P445,012) 1,446,944 P 85,638

2010 Real Estate Development Eliminations (Amounts in Thousands) P8,559,474 1,100,851 P9,660,325 P2,767,865 148,829 P2,619,036 P33,310,635 P19,946,006 (P5,159,004) (2,562,689) 15,850,347 P66,331 (P65,961) (637,917) (P703,878) (P600,000) (P600,000) (P2,863,331) (P1,925,964) P (600,000) (527,500) P Consolidated P9,556,383 462,934 P10,019,317 P3,170,509 148,829 P3,021,680 P43,699,628 P18,043,789 (P5,604,016) (1,715,745) 15,322,847 P66,331 85,638

2012 P21,578,437,825 353,594,843 195,474,558 33,913,390 25,550,785 968,776,004 P23,155,747,405

2011 P16,183,740,954 423,044,526 3,333,996 29,337,606 39,766,664 101,333,465 228,705,038 P17,009,262,249

2010 P9,118,069,504 301,956,872 95,578,405 39,956,622 28,774,427 349,434,031 85,546,645 P10,019,316,506

Inter-segment revenue pertains to commission from sale of real estate and interest income from loans. Commission is based on a certain percentage of the selling price and interest is based on prevailing market rates.

24. FinancialRiskManagementObjectivesandPolicies The Companys principal financial instruments comprise cash and cash equivalents, cash in escrow, investments held for trading, AFS investments and bank loans. The primary purpose of these financial instruments is to finance the Companys operations. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the Companys financial instruments are credit risk, liquidity risk and equity price risk. The Company has no exposure to interest rate risk on its loans payable as all have fixed interest rates. Also, the Companys exposure to foreign exchange risk is minimal. The BOD and management review and approve the policies for managing each of these risks as summarized below. Credit Risk It is the Companys policy that customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis such that the Companys exposure to bad debts is not significant. Given the Companys diverse customer base, there are no large concentrations of credit risk. As of December 31, 2012 and 2011, there were no significant credit risk concentrations. With respect to credit risk arising from the other financial assets of the Company, which comprise cash and cash equivalents, investments held for trading and AFS investments, the Companys exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Since the Company trades only with recognized third parties, there is no requirement for collateral. As of December 31, 2012 and 2011, the analysis of receivables, excluding advances to contractors, that were past due but not impaired are as follows:
Neither Past Due nor Impaired P20,677,340,033 842,894,782 217,123,686 P21,737,358,501 2012 Past Due but not Impaired 30 Days P296,522,313 P296,522,313 90 Days P415,004,570 P415,004,570 120 Days P160,630,709 P160,630,709 150 Days P143,770,055 P143,770,055 More than 150 Days P411,624,577 P411,624,577 Impaired P187,778,864 P187,778,864 Total P22,292,671,121 842,894,782 217,123,686 P23,352,689,589

Sale of real estate Advances to related parties Others

Sale of real estate Advances to related parties Others

Neither Past Due nor Impaired P12,158,841,689 180,213,052 90,447,497 P12,429,502,238

2011 Past Due but not Impaired 30 Days P124,930,080 P124,930,080 90 Days P138,055,282 P138,055,282 120 Days P68,335,876 P68,335,876 150 Days P55,521,032 P55,521,032 More than 150 Days P352,606,015 P352,606,015 Impaired P80,572,082 P80,572,082 Total P12,978,862,056 180,213,052 90,447,497 P13,249,522,605

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The table below shows the maximum exposure to credit risk for the components of the Companys financial assets as shown in the consolidated balance sheets as of December 31, 2012 and 2011: Cash and cash equivalents* Financial assets at FVPL Investments held for trading Receivables: Sale of real estate Advances to related parties Others AFS investments Stocks: Listed Unlisted Deposit and Other assets Cash in escrow Total credit risk exposure 2012 P8,174,399,512 579,476,898 22,292,671,121 842,894,782 217,123,686 4,908,679,905 65,642,801 98,996,375 P37,179,885,080 2011 P5,911,641,740 384,002,340 12,978,862,056 180,213,052 90,447,497 4,661,488,961 65,642,801 2,193,231,515 P26,465,529,962

*Excluding cash on hand amounting to P2.6 million and P1.6 million as of December 31, 2012 and 2011, respectively.

Receivables from sale of real estate have minimal credit risk as these are effectively collateralized by the respective unit sold, of which titles are not transferred to the buyers until full collection. Credit Quality of Financial Assets The credit quality of financial assets is managed by the Company using high grade and standard grade as internal credit ratings. High Grade. This pertains to counterparty who is not expected by the Company to default in settling its obligations, thus, credit risk exposure is minimal. This normally includes large prime financial institutions, companies, government agencies and individual buyers. Credit quality was determined based on the credit standing of the counterparty. Standard Grade. Other financial assets not assessed as high grade financial assets are included in this category. As of December 31, 2012 and 2011, the credit analyses of the Companys financial assets are as follows: 2012 Grade Standard Grade P 65,642,801 P65,642,801

Financial assets at FVPL Investments held for trading Loans and receivables: Cash and cash equivalents* Receivables and advances: Sale of real estate Advances to related parties Others AFS investments Stocks: Listed Unlisted Deposit and Other assets: Cash in escrow At December 31, 2012
*Excluding cash on hand amounting to P2.6 million.

High Grade P579,476,898 8,174,399,512 20,677,340,033 842,894,782 217,123,686 4,908,679,905 98,996,375 P35,498,911,191

Total P579,476,898 8,174,399,512 20,677,340,033 842,894,782 217,123,686 4,908,679,905 65,642,801 98,996,375 P35,564,553,992

Financial assets at FVPL Investments held for trading Loans and receivables: Cash and cash equivalents* Receivables and advances: Sale of real estate Advances to related parties Others AFS investments Stocks: Listed Unlisted Deposit and Other assets: Cash in escrow At December 31, 2011
*Excluding cash on hand amounting to P1.6 million.

High Grade P384,002,340 5,911,641,740 12,158,841,689 180,213,052 90,447,497 4,661,488,961 2,193,231,515 P25,579,866,794

Grade

2011 Standard Grade P 65,642,801 P65,642,801 Total P384,002,340 5,911,641,740 12,158,841,689 180,213,052 90,447,497 4,661,488,961 65,642,801 2,193,231,515 P25,645,509,595

Liquidity Risk The Company seeks to manage its liquidity profile to be able to finance its capital expenditures and service its maturing debts. The Companys objective is to maintain a balance between continuity of funding and flexibility through valuation of projected and actual cash flow information. The Companys financial assets with maturities of 12 months or less are used to fund the Companys immediate liquidity requirements. These comprise cash and cash equivalents and investments held for trading amounting to P8,177.0 million and P579.5 million, respectively, as of December 31, 2012, and P5,913.2 million and P384.0 million, respectively, as of December31, 2011. The Companys quoted AFS investments will be used when cash and cash equivalents and investments held for trading cannot cover the Companys liquidity requirements.

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The table below summarizes the maturity profile of the Companys financial liabilities as of December 31, 2012 and 2011 based on contractual undiscounted payments: On Demand P 576,631,065 97,664,220 26,114,521 P700,409,806 Within 1 Year P9,737,496,216 6,473,737,710 2,785,094,400 P18,996,328,326 2012 Above 1 Year P18,841,754,280 2,603,376,646 P21,445,130,926 Total P28,579,250,496 6,473,737,710 5,388,471,046 576,631,065 97,664,220 26,114,521 P41,141,869,058

Loans payable including interest Accounts payable and other liabilities* Trade payable Payable arising from acquisition ofland including interest Accrued expenses Payable to related parties and others Dividends payable

*Excluding deferred rent income and government payables amounting to P887.4 million as of December 31, 2012.

Loans payable including interest Accounts payable and other liabilities* Trade payable Payable arising from acquisition ofland Accrued expenses Payable to related parties and others Dividends payable

On Demand P 231,703,584 63,039,791 25,687,463 P320,430,838

Within 1 Year P1,760,083,500 2,104,763,383 1,680,075,988 P5,544,922,871

2011

Above 1 Year P11,613,558,000 131,348,770 P11,744,906,770

Total P13,373,641,500 2,104,763,383 1,811,424,758 231,703,584 63,039,791 25,687,463 P17,610,260,479

*Excluding deferred rent income and government payables amounting to P899.0 million as of December 31, 2011.

Equity Price Risk The Companys exposure to equity price risk pertains to its investments in quoted equity shares which are either classified as investments held for trading or AFS investments in the consolidated balance sheets. Equity price risk arises from the changes in the levels of equity indices and the value of individual stocks traded in the stock exchange. As a policy, management monitors the equity securities in its investment portfolio based on market expectations. Material equity investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by management. The effect on income before tax and equity (as a result of change in fair value of investments held for trading and AFS investments as of December 31, 2012 and 2011) due to a possible change in equity indices, with all other variables held constant is as follows: 2012 Change in Equity Price Investments held for trading AFS investments 2011 Change in Equity Price Investments held for trading AFS investments +9% -9% +9% -9% +7% -7% +7% -7% Effect on Income Before Income Tax P22.8 (22.8) Effect on Income Before Income Tax P20.0 (20.0) Effect on Equity After Income Tax P 300.9 (300.9) Effect on Equity After Income Tax P 415.9 (415.9)

(In Millions)

(In Millions)

Capital Management The primary objective of the Companys management is to ensure that it maintains a strong credit rating and healthy capital ratios to support its business and maximize shareholder value. The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, payoff existing debts or issue new shares. No changes were made in the objectives, policies or processes during the years ended December 31, 2012 and 2011. The Company monitors capital based on debt-to-equity ratio, net debt-to-equity ratio, return on assets and return on equity. Debt includes the Companys loans payables and interest-bearing payables arising from acquisition of land. Total equity includes capital stock, additional paid-in capital, retained earnings and unrealized mark-to market gain on available-for-sale investments. As of December 31, 2012 and 2011, the Companys ratios are as follows: Ratios Debt-to-equity ratio (Interest-bearing debt over total equity) Net debt-to-equity ratio (Interest-bearing debt less cash and cash equivalents over total equity) Return on assets (Net income over total assets) Return on equity (Net income over total equity) 2012 0.65:1.00 0.44:1.00 6.1% 12.2% 2011 0.31:1.00 0.14:1.00 7.7% 11.8%

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25. Fair Value of Financial Instruments The table below presents a comparison of the carrying amounts and fair values of all of the Companys financial instruments, by class and by category, as of December 31: Financial Assets Financial assets at FVPL Investments held for trading Loans and receivables: Cash and cash equivalents Receivables and advances: Sale of real estate Advances to related parties Others Cash in escrow (included in Deposit and Other assets) Total loans and receivables AFS investments: Stocks: Listed Unlisted Total AFS investments Total Financial Assets Financial Liabilities Other financial liabilities: Loans payable Accounts payable and otherliabilities: Trade Payable arising from acquisitionofland Accrued expenses Payable to related parties and others Dividends payable Total Financial Liabilities Carrying Amount 2012 Fair Value Carrying Amount 2011 Fair Value

P579,476,898 8,176,966,683 22,292,671,121 842,894,782 217,123,686 98,996,375 31,628,652,647 4,908,679,905 65,642,801 4,974,322,706 P37,182,452,251

P579,476,898 8,176,966,683 20,980,708,275 842,894,782 217,123,686 98,996,375 30,316,689,801 4,908,679,905 65,642,801 4,974,322,706 P35,870,489,405

P384,002,340 5,913,175,491 12,978,862,056 180,213,052 90,447,497 2,193,231,515 21,355,929,611 4,661,488,961 65,642,801 4,727,131,762 P26,467,063,713

P384,002,340 5,913,175,491 11,991,932,484 180,213,052 90,447,497 2,193,231,515 20,369,000,039 4,661,488,961 65,642,801 4,727,131,762 P25,480,134,141

P24,713,776,921 6,473,737,710 4,977,105,380 576,631,065 97,664,220 26,114,521 P36,865,029,817

P25,823,490,558 6,473,737,710 5,049,379,824 576,631,065 97,664,220 26,114,521 P38,047,017,898

P10,944,225,993 2,104,763,383 1,811,424,758 231,703,584 63,039,791 25,687,463 P15,180,844,972

P11,766,911,392 2,104,763,383 1,811,424,758 231,703,584 63,039,791 25,687,463 P16,003,530,371

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value: Cash and Cash Equivalents, Receivables and Advances - Current Portion, Cash in Escrow, Short-term Loans Payable, Accounts Payable and Other Liabilities and Dividends Payable The carrying amounts approximate fair values due to the short-term nature of the transactions. Receivables and Advances - Noncurrent Portion The fair value is based on the discounted value of future cash flows using the applicable rates for similar types of instruments. The discount rates used ranged from 5.0% and 5.5% to 8.0% as of December 31, 2012 and 2011. Investments Held for Trading and AFS Investments The fair values of quoted equity securities were determined by reference to published two-way quotes of brokers as of balance sheet date. Unlisted common shares of stock are unquoted and there are no other reliable sources of their fair market values and are, therefore, stated at cost. Fixed Rate Loans and Payable Arising from Acquisition of Land The estimated fair value is based on the discounted value of the future cash flows using the discount rate ranging from 1.5% to 5.0% in 2012 and 2.7% to 5.0% in 2011. Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or directly Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data The following table shows the Companys financial assets carried at fair value as of December 31 based on Level 1: 2012 P579,476,898 4,908,679,905 P5,488,156,803 2011 P384,002,340 4,661,488,961 P5,045,491,301

Financial assets at FVPL Investments held for trading AFS investments Listed stocks

As of December 31, 2012 and 2011, the Company has no financial instruments carried at fair value which is based on Levels 2 and 3. There were no transfers between Levels 1 and 2 fair value measurements, and no transfers into and out of Level 3 fair value measurement in 2012 and 2011.

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26. Classification of Balance Sheet Accounts The current portions of assets and liabilities are as follows: 2012 P8,176,966,683 11,355,408,188 579,476,898 4,974,322,706 1,857,043,842 1,121,565,385 4,333,714,595 P32,398,498,297 P8,506,313,000 9,921,566,139 1,730,245,790 22,386,695 26,114,521 P20,206,626,145 2011 P5,913,175,491 7,453,659,338 384,002,340 4,727,131,762 572,040,857 1,121,565,385 4,087,969,688 P24,259,544,861 P1,000,000,000 4,854,963,287 2,046,984,984 2,155,185 25,687,463 P7,929,790,919

Assets: Cash and cash equivalents Receivables and advances Investments held for trading AFS investments Condominium units for sale Advances for project development Deposit and other assets

Liabilities:

Loans payable Accounts payable and other liabilities Customers deposits Income tax payable Dividends payable

27. Registration with the Philippine Board of Investments (BOI) The Companys certain real estate sales are registered with the BOI as a new developer of low-cost mass housing projects. Under such registration, the Company is entitled to a three to four-year income tax holiday incentive (ITH) for certain projects. Such incentives will expire on various dates starting November 2013 up to November 2015. The Company availed of ITH incentives amounting to P337.0 million in 2012, P718.7 million in 2011 and P419.4 million in 2010. In 2012, two additional condominium towers were registered with the BOI. Under this registration, such development projects within Metro Manila are entitled to a three-year ITH. Period of availment for such incentive is from October 2012 to December 2015. However, ITH registrations for five condominium towers expired during the year.

28. Note to Statements of Cash Flow In 2012, the principal noncash transactions under operating activities pertain to transfer of completed construction projects under land and development to condominium units for sale, investment property and property and equipment amounting to P2,017.8 million, P74.5 million P171.7 million and respectively.

In 2011, the principal noncash transactions under operating and investing activities pertain to reclassification of completed construction to property and equipment amounting to P116.4 million and the share swap transaction of the Company with Belle, respectively (see Notes 9 and 19).
29. Provisions and Contingencies

The Company is currently involved in certain legal cases related to landownership issues. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The outcome of these legal proceeding are not presently determinable. In the opinion of management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will not have a material or adverse effect on the Companys financial positions and results of operations. Disclosure on additional details beyond the present disclosures may prejudice the Companys position and strategy. Thus, as allowed by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, only general descriptions were provided.

2012 AWARDS

SM Development Corporation
Institute of Corporate Directors Gold Award for Corporate Governance Forbes Asia Among the 200 Best Companies in Asia Under A $Billion Readers Digest Gold Award, Most Trusted Brand in the Property Developer category 24th Sydney Fiesta Kultura 2012 Criteria Incentive Award, Trade Display Winner, Best Presented Stall BCI Asia Cited as one of the Top Ten Developers in the Philippines Corporate Governance Asias 3rd Asian Corporate Director Awards Mr. Henry Sy, Jr. Corporate Governance Asias 2nd Asian Excellence Recognition Awards Mr. Henry Sy, Jr.-Asias Best CEO (Investor Relations) BizNews Asia Mr. Henry Sy, Jr., Management Excellence Award

DEVELOPMENT CORPORATION
SM Development Corporation Two E-com Center, 15th Floor, Harbor Drive Mall of Asia Complex, CBP-1A, Pasay City 1300 Philippines

Investor Relations
Please contact: Gema O. Cheng Chief Finance Officer SM Development Corporation Telephone: (632) 857-0100 E-mail: gema.cheng@sminvestments.com Website: www.smdevelopment.com

For other Concerns, Issues or Inquiries


Please contact: Gil L. Gonzales VP for Corporate Governance & Risk Management Address: One E-com Center, 10th Floor, Harbor Drive Mall of Asia Complex, Pasay City Telephone: (632) 857-0100 Email: smiccorpgovernance@sminvestments.com

www.smdevelopment.com