Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lendlease 2020 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Steve McCann. Thank you. Please go ahead.

Good morning, and welcome to the Lendlease 2020 Half Year Results Presentation. My name is Steve McCann, Group Chief Executive Officer and Managing Director of Lendlease. Sitting here at Barangaroo in Sydney, I acknowledge we're on the land of the Gadigal people and extend my respects to their elders, past, present and emerging. Joining me in the room is Tarun Gupta, Group Chief Financial Officer. Firstly, I'll provide an overview of Lendlease's results for the period ended December 31, 2019. I'll then hand over to Tarun, who will talk through the financial results before I provide an update on our operations and outlook. We'll then be available to take questions. As always, our first and most important priority is health and safety. Every day, tens of thousands of people around the world come to a Lendlease place to work. As our business grows, so do the number of workers in our care. Our commitment to their health and safety and everyone who interacts with us is our highest priority. Tragically, in September 2019, a construction worker was seriously injured in a critical incident on a project in Kuala Lumpur where Lendlease is the construction manager. While recovering from the surgery in hospital, the man contracted an infection and subsequently passed away in October. On behalf of all at Lendlease, I extend my heartfelt condolences to his family, friends and colleagues. This is a powerful reminder of the need to keep safety at the forefront, and we'll continue to maintain a relentless focus on safety leadership throughout the organization. Notwithstanding this tragedy, the strive for continuous improvement across our business and recent enhancements to our analytics and assurance practices has supported an improved safety performance in HY '20. The frequency rate for lost time injuries was 1.3, and the percentage of operations without critical incidents was 94%. Moving now to Slide 5. Lendlease's core strategy is focused on urbanization in gateway cities, and we aim to be the global urbanization partner of choice. Our ability to deliver major urbanization projects through our integrated model, together with our financial strength and strong track record, provide a point of difference we believe few can match. We apply a disciplined commercial approach informed by the 6 key trends which drive our business model. This helps us create great places, which make a positive contribution in meeting the world's significant urbanization needs. Our long-term value is underpinned by 5 focus areas that drive our approach to create safe, sustainable and profitable outcomes for our people, customers, partners and securityholders. Turning now to ESG on Slide 6. The group has a proud history of leadership in sustainability, which has been critical to our success in securing urbanization projects and creating great places. During the period, the group published 4 climate scenarios in line with the Task Force for Climate-related Financial Disclosure or TCFD recommendations and is the only company in the real estate sector participating in the TCFD Secretariat's advisory group for scenario planning. We are committed to creating strategic resilience across the business. The extreme bush fire season in Australia, together with recent severe storms in a number of regions, point to more volatile weather conditions globally. These events and the impacts of climate change strengthen our resolve to address the climate impacts of our business with greater focus and direct action. To this end, our Australian construction business achieved net 0 carbon in FY '19. We also have commitments in place for assets representing more than $12 billion in gross asset value to operate at a net 0 carbon basis by 2025. In December, our business sign up was the first real estate company to become a member of the responsible steel initiative, which aims to drive low to 0 carbon steel solutions for our supply chain. More than a decade ago, Lendlease bid for Barangaroo South with a bold vision to achieve carbon neutrality across the entire precinct. That vision was realized at the end of last year with the Commonwealth government certifying it as Australia's first carbon-neutral precinct. Through the Lendlease Foundation, we formed new partnerships with Red Cross, OzHarvest and Landcare and renewed our long-term partnership with MATES in Construction. These shared value partnerships are focused on creating measurable socioeconomic value by addressing social issues and the needs of the communities that we operate in, whilst aligning with our sustainability objectives. In the 2019 Global Real Estate Sustainability Benchmark, APPF Commercial was the highest-ranked property fund. It has achieved that ranking in 5 of the last 6 years. Four of our managed funds ranked in the top 10 globally, including APPF Retail, which was named sector leader across all listed and unlisted retail funds. To further support the management team as we deliver our extensive global development pipeline, 2 nonexecutive directors were appointed. These new appointments will bring further international property investment, development and construction expertise to the Board and provide valuable perspective with their domicile in the U.K. and the U.S. Turning to Slide 7. The noncore segment that comprises the Engineering and Services businesses has been reported as a discontinued operation in HY '20. The sale of our Engineering business to Acciona for $180 million was agreed in December 2019. The transaction, which is subject to conditions, is expected to complete in the first half of this calendar year. Acciona will acquire the business, excluding the NorthConnex and Kingsford Smith Drive projects, which will be completed by Lendlease. Both projects are more than 90% complete and are expected to finish this calendar year. The Melbourne Metro Tunnel project is currently being retained by Lendlease. We have previously outlined there have been issues in relation to the scope and costs on the project. The consortium continues to work with government on a confidential basis to resolve these issues while delivering the project to achieve the government's completion dates. The loss on exiting the Engineering business will reflect a combination of exit-related costs and proceeds from sale relative to the carrying value of the business on completion of the transaction. The sale process for the Services business continues, notwithstanding the withdrawal of a party with whom we had been in advanced negotiations. We have subsequently reengaged with other potential acquirers, although that process is in a preliminary stage. In effecting the sale, we will look to realize the best possible outcome for our employees, customers and securityholders. Total estimated cost of $450 million to $550 million to exit the Engineering and Services businesses remain appropriate. Tarun will provide more detail on the composition of these costs. Turning briefly to the performance of the noncore segment, which recorded EBITDA of $23 million, inclusive of $7 million of exit costs. Engineering was breakeven with a gross profit offset by overheads, and to a much lesser extent, the exit costs. Both the Melbourne Metro and WestConnex tunnel projects reached 20% complete towards the end of the half. New work secured, included the bulk earthworks contract at Western Sydney International Airport and additional works on the Southern Program Alliance in Victoria. The services business delivered solid performance with an EBITDA margin of approximately 5%. New work secured of $1.1 billion included telecommunications contracts and a multiyear contract with Sydney Water. Turning now to the group result on Slide 8. For HY '20, the group's core business generated profit after tax of $308 million and a return on equity of 9.6%. Group profit after tax was $313 million with earnings per stapled security of $0.555. The interim distribution of $0.30 per security represents a payout ratio of 54% within the 40% to 60% target range. The cornerstone of the group's strategy is to create the best urban precincts in key global gateway cities. In this regard, substantial progress was made towards setting the group up to deliver on its strategy now and into the future. Two new major urbanization projects were added to the pipeline, generating significant growth. A development joint venture was formed with an existing capital partner on the Victoria Cross Over Station Development, and our flagship project in Singapore, Paya Lebar Quarter completed, exceeding both our financial and nonfinancial performance targets. Development return on invested capital of 7.3% reflected activity across several urbanization projects. Development earnings are expected to be skewed to the second half of the financial year driven by commercial and residential activity across our urbanization pipeline. The core construction margin of 2.3% was generated on $4.3 billion of revenue. Our Construction business is highly regarded in each of our target markets and continues to generate stable returns. In the U.S., we are consistently ranked as a leading high-rise residential builder, and in Australia, we were recently named the top infrastructure contractor by the Australian Department of Defense. The investments work of 10.7% reflected strong fee income including recognition of performance fees following the completion of Paya Lebar Quarter. Our investment platform continues to attract global capital, looking for access to our asset-creation capabilities and quality pipeline. The investments platform is well placed to continue to grow strongly and provide a solid base of recurring earnings for the group. Turning to Slide 9. Our ability to deliver transformational urban precincts with a focus on environmental, social and financial outcomes is recognized globally. Continued origination success during the period has driven our urbanization pipeline to almost $100 billion within a total development pipeline of $112 billion. Two major residential-led urbanization projects with an estimated end-development value of more than $36 billion were secured, adding further long-term earnings visibility. In London, the Thamesmead Waterfront development is expected to create 11,500 homes, in addition to new cultural community and commercial space. We have partnered with Google to develop 3 mixed-use communities in the San Francisco Bay area. The scheme is anticipated to deliver more than 15,000 new homes over a 10- to 15-year time frame. In Sydney, the first of 3 residential towers at One Sydney Harbor Barangaroo was launched to high demand. The project currently has more than $1.4 billion in presales, with the Penthouse setting an Australian record sale price. In Chicago, 2 buildings at Lakeshore East comprising apartments for sale and rent were put into delivery in partnership with our capital partner. Several third-party capital initiatives were progressed. A development joint venture was formed to deliver the 58,000 square meter Victoria Cross Over Station Development, contributing to half year profit. The listing of the Lendlease Global Commercial REIT in Singapore demonstrates the support for the group's global Fund and asset management expertise. The retail and residential components of Singapore's newest lifestyle precinct Paya Lebar Quarter completed. This marks the culmination of a 4-year development joint venture with our capital partner which has delivered approximately $4 billion of product, including 3 office towers, a retail mall and more than 400 apartments. These initiatives continue to demonstrate the strength and attractiveness of our development pipeline and integrated business model. Turning now to Slide 10. Our commitment to our core urbanization strategy is unwavering. Since FY '14, our urbanization pipeline has quadrupled from $25 billion to almost $100 billion, with 21 major urbanization projects in delivery. The endorsement of our capability is highlighted by the success and vibrancy of our completed projects such as Paya Lebar Quarter in Singapore and Darling Square in Sydney, where we have created world-class destinations for people to live, work and visit. While Barangaroo South is not expected to fully complete until FY '26, it is already being heralded as a global benchmark in urban regeneration. In recent years, our development activity has averaged $4 billion per annum. Given the significant growth in the pipeline, we are well placed to accelerate the rate of production materially over the medium term. We have continued to implement what we call our new ways of working, to take the best of what we currently do to enable the group to deliver at a much greater scale. We are already seeing tangible results, most notably in our global residential practice. Our investment in internal capability is designed to support the safe, sustainable and profitable delivery of our growing pipeline. We aim to come back to the market mid this year with more detail on our revised delivery targets. More than $50 billion of institutional-grade investment product is expected to be created from the secured pipeline. This comprises approximately $30 billion of commercial assets or more than 50 buildings, and approximately $20 billion of residential for-rent assets or more than 19,000 apartment units. This will provide our capital partners with access to a broader range of high-quality investment assets, in addition to greater opportunities to participate alongside us in development activities. Since FY '14, funds under management has more than doubled from $16 billion to $37 billion, and the group is well placed to double funds under management again as the urbanization pipeline is delivered. I'll now hand over to Tarun.

Thanks, Steve, and good morning, everyone. Turning to our financial performance for half year '20 on Slide 12. Core operating EBITDA was down 3% to $628 million. Development EBITDA rose by 4%. The final development profit on Paya Lebar Quarter was recognized following completion of the retail mall and apartments. There was a $31 million gain on sale on the establishment of the Victoria Cross Commercial Trust that will deliver the Victoria Cross Over Station Development. In addition, there was a valuation uplift of $92 million for the group's remaining 75% interest in the joint venture. There were 1,146 apartment settlements and completions in the period. Solid margins were generated on the residential for-sale apartments at Clippership Wharf in Boston, Elephant Park in London and Collins Wharf in Melbourne. Profit on approximately 700 of these apartments was largely booked in prior periods. These relate to apartments at Paya Lebar Quarter and residential for-rent apartments at Clippership Wharf. The default rate on apartments for sale was below 1%. The Australian master plan communities portfolio had a subdued period with settlements of 836 lots, impacted by market conditions and production and planning delays on key projects. The Construction segment EBIT delivered EBITDA of $101 million, down 9%, with the EBITDA margin up from 2.1% to 2.3%. The 17% decline in revenue was partially driven by activity on integrated projects being recognized in the Construction segment in the prior corresponding period. Both revenue and earnings derived from the construction of buildings on integrated projects were reported in the Development segment from second half FY '19. This approach was adopted to more accurately reflect the returns the group generates from its urbanization projects through the integrated model. Comparisons with the prior corresponding period are, therefore, impacted by this change. Investments EBITDA of $255 million was down 7%. Strong operating earnings from the Investments platform were more than offset by lower ownership earnings on the back of reduced co-investment revaluations and retirement living earnings. The adoption of the new leasing accounting standard, AASB 16, triggered a reclassification of operating lease expenses to finance costs and depreciation. This change resulted in lower operating costs and higher depreciation and finance costs. On a like-for-like basis, group services costs was 6% higher based on investment in productivity and efficiency initiatives. Higher average net debt was also a contributor to the rise in net finance costs. Moving now to Slide 13. The chart provides an overview of the major movements in net cash flows during the period and a longer-term view on historic cash conversion. We commenced the year with $1.3 billion in cash. Underlying operating cash flow was $29 million, with the impact of maturing places instruments and timing of receipts across the Development and Investment segments, key drivers of cash flow for the half. Underlying investing cash flows of $503 million reflect the group's ongoing deployment of capital into the development pipeline and contributions into the investment platform, including the establishment of the Lendlease Global Commercial REIT. Net financing inflows of $425 million reflected the drawdown of existing facilities. We closed the period with a cash balance of $1.1 billion. Cash flow coverage, that is underlying operating cash flow to EBITDA, has averaged 84% since FY '16. That level is broadly in line with where we expected to trend over the medium to long term. Over shorter periods, there will be some variability, as was the case in half year '20. While the cash flow coverage was only 5%, the key driver of this was the maturing of the PLLACes product in the period. The product results in the sell-down of presold apartment revenue ahead of completion, with the PLLACes investors receiving the cash on settlement. This is a risk-mitigation tool which provides protection in the event of significant apartment defaults. In half year '20, $220 million of PLLACes product matured. The group currently has no outstanding PLLACes instruments. In addition, the mismatch of profit recognition from timing of cash flow receipts was larger than usual in the period. For example, the cash payment on the Paya Lebar Quarter performance fee that was booked in the first half was received post balance date. Looking now at the group's financial position on Slide 14. The group remains in a strong financial position with gearing at the midpoint of the 10% to 20% target range. The key drivers of the rise in gearing from June 2019 were the net cash generation I discussed and the $800 million increase in invested capital across the Development and Investment segments. The interest cover ratio was 7.4x. Net debt ended the period at $2.3 billion, up from $1.4 billion at FY '19 and in line with the prior corresponding period. The average cost of debt declined to 3.6% during the period. While average debt maturity is 3.9 years, with no material debt expiries until FY '22. The group's liquidity position is $3.1 billion, which includes the group's share of cash from joint operations of $700 million which is reported in the balance sheet as assets held for sale. In terms of where we see the financial position of the group at 30 of June 2020. Gearing is forecast to be in the range of 15% to 20%. This assumes the completion of the sale of the Engineering business in the second half. The anticipated cash flow impact of the sale remains in line with the estimates at the time the agreement was announced. 1/3 of the sale price, being $60 million, less transaction costs, is scheduled to be received on settlement. A negative working capital balance, backed by cash, will be transferred with the business. As at 31 December, that amount was approximately $425 million for the projects included in the sale agreement. The actual amount of working capital may vary at settlement. For context, had the completion of the sale occurred in FY -- half year '20, gearing would have been approximately 3% higher. The remaining proceeds from the sale are due in FY '21, with the cash flow impact of the remaining exit costs relating to engineering expected to be incurred over several years. Exit costs relating to services will be dependent on the timing of the sale of that business. The previously disclosed cost estimate to exit the noncore segment of $450 million to $550 million pretax remains appropriate, with $22 million expensed to date. Exit-related costs include implementation and selling costs, indemnities included in any sale agreement and potential cost to cover concluding projects retained by the group. This cost estimate, together with existing provisions, is considered appropriate to cover concluding retained projects and to exit the noncore segment. We remain committed to maintaining an investment-grade credit rating and the capacity to absorb and respond to market volatility. Turning now to our core business performance for the period against the portfolio of management framework targets on Slide 15. In terms of EBITDA mix, all 3 segments were within their target ranges. The segment invested capital mix continues to be weighted towards development, reflecting the significant amount of development activity that is underway. The continued implementation of our international gateway city strategy resulted in a reduction in the proportion of capital allocated to Australia in recent years. Returns across each of the segments was solid. Development returns were below the target range reflecting an expected skew to the second half. There was also a second half skew in FY '19. The construction margin was within the target range, and the Investment segment was at the top of the target range. Looking now at Slide 16. As an organization, we are focused on delivering consistent returns over the longer term for our securityholders. This chart illustrates the performance of the core business over the last 5 financial years, including returns to date in the current year. Both the Development and Construction segment returns have been at the midpoint of their respective target ranges over this time, while the Investment segment outperforming. This has enabled the group to achieve a core business return on equity towards the upper end of the target range. We believe the foundations are in place for the core business to continue to perform strongly. I will now hand back to Steve for an operational update.

Thanks, Tarun. Turning to Slide 18. A very disciplined and focused strategy of targeting key gateway cities has resulted in strong growth across the platform and provides the group with the opportunity to extend the leadership position in what we term as creating place in urban precincts. Today, we operate in 15 gateway cities, and of those, our 21 major urbanization projects are located in 9. We've secured a great pipeline and are working hard on enhancing our operating structure for success across a scale platform. Our development pipeline, the front end of the integrated model, is the key for the future growth of construction on integrated projects and the Investment segment. Moving to the development segment on Slide 19 and focusing on apartments. As I've just noted, the pivot towards international urbanization projects in recent years is producing results, particularly as these projects move into delivery. It has also provided diversity by product with our entry into the residential for rent sector. Apartment settlements and completions were recorded across several gateway cities, primarily outside of Australia. Delivery commenced on One Sydney Harbor Barangaroo, and given the scale of the development, we're exploring potential joint venture opportunities. At Lakeshore East in Chicago, apartments for sale and rent were also put into production. The 2 new major urbanization projects secured in HY '20 are both residential-led and have contributed more than 26,000 units to the now 57,000-unit pipeline. Approximately 1/3 of these are expected to be residential for rent units. Turning to our commercial performance on Slide 20. As I noted earlier, a development joint venture was formed to deliver the Victoria Cross Over Station Development in Sydney. The transaction with the Lendlease-managed APPF Commercial demonstrates the value of the integrated model, where our asset-creation capabilities provide our capital partners with access to high-quality investment product. Three commercial buildings were completed during the period across 3 major urbanization projects. The retail mall of Paya Lebar Quarter in Singapore is 90% let and performing well. It has a strong anchor mix with fair price finest, Kopitiam and UNIQLO. The third commercial building at International Quarter London and the final commercial building, Daramu House at Barangaroo, South in Sydney were also completed. There are a further 5 major commercial buildings in delivery with an estimated end value of $5.4 billion. Potential conversion opportunities looking out to FY '22 are promising, with 18 buildings or 523,000 square meters in various stages of planning. Within that, nearer-term opportunities include 2 office buildings at Milano Santa Giulia, a fourth building at International Quarter London, and buildings at Melbourne Quarter and Brisbane Showgrounds. Post balance date, we secured leasing for approximately 85% of 2 buildings at Milano Santa Giulia on which we are currently progressing capital partner discussions. The final commercial building in Melbourne Quarter project has planning approval and is currently being marketed to potential tenants and capital partners. Moving now to the remainder of our Development segment on Slide 21. There were 836 land lot settlements across our Australian master-planned communities portfolio. The 8% decline on the prior corresponding period reflected both soft market conditions and a lack of titled stock in New South Wales, resulting in few settlements in that state. We believe that HY '20 will mark the low point this cycle for settlements. Sales were up approximately 30% in HY '20 when compared with the second half of FY '19, and inquiry levels in January were more than 30% above those from a year ago. For financial year '20 an improved H2 is likely to still leave settlements well below the 2,500 lots achieved in FY '19. In the United States, we continue to work through our telecommunication development pipeline with 64 towers completed in the period and 135 new towers launched. We revisited our joint venture with Softbank given the likely industry consolidation. That now appears inevitable following the recent Federal Court ruling in the U.S., allowing the merger between Sprint, majority-owned by SoftBank, and T-Mobile to proceed. In the lead-up to that, we took the decision to dissolve the joint venture with Softbank. However, we continue to originate opportunities in the sector through the master lease agreements we have with other major carriers. Moving on to the construction segment on Slide 22. The operational performance continues to be solid. The business completed a number of significant projects during the half, showcasing its capabilities across social infrastructure, office and mixed-use urbanization. New work secured was softer in the period as a result of lower activity in the Americas, most notably, the key New York market, and some delays in projects being brought to market. In addition, our Australian business came off a very strong prior period of project wins. The new work secured is well diversified by sector and client, although almost 2/3 was contributed by Australia. The outlook for the Construction segment remains solid with backlog revenue of $14 billion. Approximately 80% of this backlog will generate future revenue and margin for the Construction segment with the balance being internal work. Our well-established construction businesses in Australia and the Americas each have a strong pipeline of work, while recent growth in the urbanization pipeline in the Americas and Europe is expected to provide a significant amount of construction work in coming years. Beyond the current backlog, there's approximately $10 billion of work for which the group is in a preferred position across both external and integrated projects. Moving to Slide 23 and our Investment segment. Firstly, looking at operating earnings in the segment, which are derived from our fund and asset management platforms. Performance for the period was up strongly with EBITDA of $120 million. Funds under management grew 8% on the prior corresponding period underpinned by the listing in Singapore of the Lendlease Global Commercial REIT and further contribution from our recently established residential for rent asset class. Residential funds under management has doubled from the prior corresponding period. The growth in total funds under management supported higher base management fees, while the completion of the $4 billion Paya Lebar Quarter, which exceeded our financial and nonfinancial targets, generated a significant performance fee. Our urbanization pipeline provides a very strong growth outlook for funds under management. The $30 billion of assets under management across military housing, office and retail provides a steady base of recurring earnings. Turning now to Slide 24 and our ownership earnings, which are derived from our $4 billion of investments. Earnings were down in the period, mainly due to less asset value appreciation compared to HY '19 and lower retirement earnings. Co-investment revaluations were 3% of core operating earnings, down from 12% in HY '19. The Retirement living business was impacted by softer market conditions. A resilient performance from the established Village portfolio, with resales up 14% compared to the same period last year, was offset by a modest decline in prices and lower development activity. The group's co-investments increased on the back of the launch of the Lendlease Global Commercial REIT, of which Lendlease owns 24%. Following the completion of Paya Lebar Quarter, Lendlease's 30% interest is now also reported in the Investment segment. We will continue to look to grow and recycle our investments to maximize risk-adjusted returns. Moving to Slide 26. Firstly, to the impact of coronavirus, we're taking all necessary precautions to look after the health of our employees. Whilst it is early, there has been limited impact on the business to date. The near-term outlook for the core business is supported by the expected conversion of both commercial and residential development opportunities which should skew earnings to the second half. The group is strongly positioned for long-term growth. Our origination and place-making capabilities are unrivaled, and our success at securing international projects is testament to our strategy and the depth of talent we have built. I'd like to conclude by thanking our team for their outstanding efforts in progressing the group's cornerstone strategy and the exit of the Engineering business. With that, I'll open it up for questions. The webcast is not 2-way, so we'll only be able to take questions over the phone. Thank you.

[Operator Instructions] Your first question comes from the line of Simon Chan from Morgan Stanley.

First question is in relation to the provisioning for Melbourne Metro. So you mentioned the sale is expected to complete in the second half. Can I assume that's when the remaining $450 million to $550 million of exit costs will be booked in your P&L? I acknowledge that cash flow could happen over a few years, but how does the accounting work?

Yes, Simon, it's Tarun here. As we said in the presentation, I think the $450 million to $550 million will be booked relating to engineering at settlement, which is expected this half. But it also, you have to note, includes our assumptions on services and also includes our assumptions on the retained projects. So it's likely a significant amount will be coming through, but the rest will be dependent on timing of those further events.

Okay, that then leads to my next question then. Your payout ratio, you said it's 54% today, Stephen. It looks like it's 54% if I based it off your group profit, your statutory profit. Is your distribution policy off statutory profit or core profit for the year?

It's off statutory profit and our policy, which is set by the Board, is a range of 40% to 60%, and we've been around that 50% level for some time now.

Great. Just moving on to APPF, and you've got a number of redemptions there. I was just wondering if you could comment on some of the options you're working through with your investors outside of asset sales?

You will have seen announcements a little while back now on the sale of Marion shopping center. So that was one of the transactions that was pursued by the team. Obviously, the decisions around meeting redemption requests, which has a 2-year window to satisfy those requests, driven by decisions made by the trustee of the vehicle. So we're not directly privy to what those decisions are and how they're being made. Suffice to say, though, they have a range of options. We understand that one of those is the potential sale of the 50% interest in Carindale shopping center, and there are various other levers. But from our team on the management side of that business, there's a high level of confidence that they'll manage those redemptions through, as you would expect.

Fair enough. And then just my final questions, perhaps maybe for Tarun. Just how do you guys see your 20% gearing target? I mean, your -- it's about 15% now, but by your own admission it's probably closer to 17% or 18% had the sale of Engineering happen in the first half. That doesn't leave you too much room to lift your development invested capital significantly, which you're actually aiming to do.

Yes. Simon, as I said, we have a lot of liquidity, and also, we are anticipating for 30 June, the gearing to be within the 15% to 20% range, and that includes our assumptions on the engineering business completing. As you know, with our business model, we have access to third-party capital. We have flagged there are a number of transactions in the residential and commercial space coming through. So I think the best way to think about it is 30 June, 15% to 20%. But in terms of us funding the capital -- the development pipeline, we have very strong capital interest from our capital partners, so we don't see any material issues there.

Your next question comes from the line of Sholto Maconochie.

Just a quick question. The pipeline's doubled. It's very high. It's sort of $100 billion. The model, once you sell Engineering services, could potentially change having been able to mark and looking at the stock again. Do you look at funding that by potentially doing some more fund-through-style development from retaining, say, 50% shares in assets rather than selling down? And how do you sort of see the mix of business going forward to grow that annuity selling? Can I kind of get a bit of multiple on that?

Yes, Sholto, it's Tarun. So I think, firstly, it's fantastic that our development pipeline is growing substantially. I think it gives us a lot of flexibility in how we bring that to life. As I said, our capital partner interest remains strong. If you look at $112 billion we have, at a target returns that we get on these projects over $20 billion in gross profit margin, now embedded in the pipeline. So it gives us a lot of flexibility but also a lot of earnings that we can share with our capital partners. In terms of decisions for specific sell-downs, et cetera, it really comes down to economic returns for those buildings at that point. We're always trying to maximize our risk-adjusted returns, and depends on the level of leasing, et cetera. So that's how we make the shorter-term decisions. And the final point I'd like to make is our Investments target is 35% to 45%. And we continue to have a bias to increase that towards the upper end of our target range through growing operating earnings, but also selectively continuing to invest in the investment pipeline.

Okay, great. And then just on the resi, one of your competitors reported yesterday and had a very strong increase in presales and upgraded their lot settlements. They did take a bit of share in the period. Another competitor had less demand on the MPC or community side. Was that delay -- the weakness more production-led because you probably weren't shovel-ready because you had a lot of -- you're obviously focusing on the apartments at Barangaroo and other parts of the business? Is it more a production issue? Because demand has been quite strong for resi and communities at the moment.

Yes, Sholto, it's predominantly, really the market conditions for -- in terms of our product mix. In the last half, we have seen sales started to come back, inquiries are rising. We did have a couple of delays, in particular, a couple of projects here in New South Wales just in terms of titling. But overall, the real upturn is going to start to come through this calendar year and leading into FY '21. As Steve called out, inquiries, up 30%, and half-on-half sales are up 30%. So the first homebuyers are coming back. There was a pullback while they were waiting for the federal government package to kick in, which has kicked in, and that demand is starting to grow. So from here on, we would anticipate the Communities business production and sales to improve.

So more a FY '21 story. And just finally on that, what lot settlements do you think you'll target -- or get this year, rather, because you're not going to hit the -- your target. What are you sort of expecting for the full lot settlements? Do you have a range or -- that you can give us?

Yes. I think we've sort of commented -- Steve said, 2,500 is what we did last year. We -- for FY '20, we will be well below that.

Your next question comes from the line of Stuart McLean from Macquarie.

I just had a question on the $450 million to $550 million exit costs in Engineering. These are unchanged over the past 12 months. You're now referencing scope and cost issues that you're in negotiations with the government. Just wondering on your confidence around that $450 million to $550 million. Kind of assumes that the current conditions you're seeing in Melbourne Metro, what you expected 12 months ago, and there's been no further deterioration.

Yes. So the comment that we've made, and we have been consistent with that estimate for a period of time now, that estimate covers the expected cost of exiting the Engineering business, and as Tarun said earlier, also cost of completing any projects that are retained by the group. In relation to the projects, we obviously have to do a review of the entire book in making that assessment. So those projects would include projects like NorthConnex and Kingsford Smith Drive, which we'll retain, and also Melbourne Metro. And that's our assessment of the most likely position that we can assess today, and we'll obviously continue to update the market on that as we progress.

And maybe the components or the buckets of that -- those exit costs, have they changed materially? NorthConnex may be a bit better, another project maybe a little bit worse?

Look, it's a holistic assessment. So we look across the whole book, and we also look across exit costs and timing of the likely completion of the sale as well.

And just on the timing, do you have to provide an indication of when you're expecting negotiations with the government to come to a head?

Look, we can't get drawn into specific comments on that. Obviously, we're in confidential discussions around all their projects.

Okay. My next question is just around development. Just looking at the potential opportunities, 3 of the 4 seem to be tenant marketing. Are you waiting for a pre-commit there or are you happy to sell as more of a development JV?

Yes, Stuart, it -- yes, again, we've got -- the buildings that Steve mentioned, they are in precommitment negotiations with tenants. Some have secured tenants like the buildings at Milano Santa Giulia, and we're in capital partner discussions. So it's a deal-by-deal approach that we have, again, always trying to maximize our risk-adjusted returns.

And does the gearing of circa 18% come into play when you're thinking about getting into a development JV maybe earlier than you had previously anticipated on some of those projects?

So decisions on each of those projects were on a case-by-case basis, obviously. So we will have regard to the pricing, we think we can achieve and what the appropriate risk return profile looks like. Sometimes, we will take some capital off the table to derisk earlier than other times. If we think that we're going to get a better economic outcome by waiting longer, then that's what we'll do. So we factor in all of those things, including, obviously, our balance sheet constraints.

Okay. And last one, just on San Francisco. I think it was 6 or 12 months ago, you said that you might be able to achieve some profits in FY '21. It's a bit of a stretch target. Is that still on the table?

Yes, Stuart, we are progressing planning of the various precincts. It's really dependent on when different precincts get planning. But clearly, we are targeting, and the team is very focused on getting the project going because that's what the community wants there and also our client, Google, want the project to kick off as soon as possible.

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