Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to Lendlease's FY '20 Results Briefing to be hosted by Mr. Steve McCann, Group Chief Executive Officer and Managing Director; and Mr. Tarun Gupta, Group Chief Financial Officer. [Operator Instructions] I must advise you that this call is being recorded today, Monday, the 17th of August, 2020. I would now like to hand the call over to your first speaker today, Mr. Steve McCann, CEO. Thank you, sir. Please go ahead.

Good morning, and welcome to the Lendlease 2020 Full 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 year ended 30 June 2020. I'll then hand over to Tarun, who will talk through the financial results before I provide an update on our operations and outlook. And we'll then be available to take questions. Moving to Slide 4. The cornerstone of the group's strategy is to create the best urban precincts in key global gateway cities. The ability to deliver major urbanization projects through our integrated business model, together with our financial strength and strong track record, provides a point of difference we believe few can match. More than 2 decades of experience creating large scale, mixed-use urban precincts has enabled the group to deepen its expertise and sophistication in delivering great places. It has also underpinned the strong growth of our Investments platform. Turning to Slide 5. 2020 will be a watershed year in history with the impacts of COVID-19 likely to reshape society for years to come. As the pandemic set in, an extraordinary effort was made by our team to keep our employees and customers safe and to support the continuation of operations. This level of focus was equally applied across all our businesses, which have quickly introduced new policies, education and support for employees and customers as restrictions and social distancing protocols became first lines of defense against the virus. The depth and breadth of the impact of the virus was the key driver of the $212 million loss after tax in the second half for the core business. This followed a solid result in the first half of which the group delivered profit after tax of $308 million. We implemented a range of measures to strengthen the financial position of the group. Costs were reduced, along with the reassessment of project expenditure. The new equity raised and the additional debt facilities we have put in place position the group to manage through a potential sustained downturn and deliver on the group strategy as the market recovers as well as consider new opportunities that are likely to emerge. Turning now to our financial focus areas on Slide 6 -- our nonfinancial focus areas on Slide 6. As always, our first and most important priority is health and safety. As previously advised in our half year results, tragically, a construction worker was seriously injured in a critical incident on a project in Kuala Lumpur, where Lendlease is the construction manager. He subsequently passed away from complications of an infection he contracted following surgery. On behalf of all at Lendlease, I again extend my heartfelt condolences to his family, friends and colleagues. It is difficult to call out positive achievements given this tragedy, but I do want to thank the commitment of our teams, which has enabled us to reduce critical incident and lost time injury frequency rates to their lowest levels since we began recording these metrics. To support our people, we launched a hardship and well-being fund with grants to help cover expenses during the pandemic. We recognize that our people are the greatest contributors to our success. To deliver on our range of great projects around the world will require us to attract and retain the very best people. We take a comprehensive approach to talent management across the group from our intake of over 400 graduates this year, over 50% of whom are female, to the cohort of 86 leaders who have participated in our Urbanisation Project Director and Construction Director programs. We have continued our strong focus on customer engagement and made very good progress on enhancing our customer base and relationships. We've conducted a range of customer surveys and are becoming increasingly sophisticated in both measuring customer satisfaction and how we respond. 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. Today, we're announcing our commitment to be a 1.5-degree Celsius aligned company with market-leading carbon targets of net zero scope 1 and 2 by 2025, an absolute zero carbon, which extends to our supply chain by 2040. We believe this can be achieved while delivering both client and shareholder value. In addition, through our interaction with communities, we are aiming to create $250 million of social value by 2025. Our new commitments and targets were developed after extensive consultation with clients, partners and employees. Turning now to the group result on Slide 7. The group reported a statutory loss after tax of $310 million for the year ended 30 June 2020. Engineering exit costs of $368 million after-tax along with $19 million of goodwill impairment relating to the anticipated completion of the sale of Engineering were expensed. And as I outlined earlier, the core business was adversely impacted by COVID-19. The group's core business generated profit after tax of $96 million, earnings per security of $0.159 and a return on equity of 1.5%. The full year distributions of $0.333 per security reflect a 54% payout ratio of first half earnings and the distribution of Trust earnings in the second half. Our performance in the second half of the year was materially down across the core business, reflecting a significant deterioration in operating conditions following the onset of the pandemic. Progress on converting opportunities across our urbanization pipeline was hindered. The impact across our construction projects was greater in our international regions, particularly in cities where mandated shutdowns were implemented. And the group's Investments portfolio was impacted by declining real estate values. While our financial performance was curtailed, substantial headway was made on our strategic agenda. Significant progress was made on growing and converting the development pipeline, including securing additional major urbanization projects, achieving important planning milestones and creating new investment partnerships to support projects moving into delivery. The group entered the new financial year in a strong financial position with gearing of 5.7% and $5.8 billion of liquidity. Moving now to Slide 8. The sale of the Engineering business is expected to be completed shortly. The sale price is $160 million and is payable in installments in FY '21, with the final amount determined following completion adjustments. The group will retain 3 projects. The completion of NorthConnex is anticipated in the coming months and Kingsford Smith Drive is scheduled to complete by the end of calendar year '20. As previously advised, the Cross Yarra Partnership consortium for the Melbourne Metro Tunnel Project is continuing to work with the Victorian government on a confidential basis to resolve issues in relation to the scope and costs on the project. The sale process for the Services business has been paused as a result of current market conditions. While the underlying business has been performing well, it is noncore and is expected to be divested in future periods. We have previously disclosed a restructuring cost estimate to exit the Engineering and Services businesses of $450 million to $550 million on a pretax basis. We now expect these costs to be approximately $550 million pretax, with $525 million pretax or $368 million after-tax accounted for in FY '20 and $15 million pretax previously accounted for in FY '19. Turning now to Slide 9. Notwithstanding the challenging market conditions experienced in the second half of the year, a number of strategic initiatives were progressed. Three investment partnerships were formed supporting the delivery of major urbanization projects in Milan and Sydney. In Milan, a new partnership was formed with PSP Investments, one of Canada's largest pension funds to develop the $4 billion Milano Santa Giulia project. The urban regeneration project is expected to deliver more than 2,500 residential units and approximately 230,000 square meters of commercial, leisure and entertainment areas. In Sydney, the 58,000-square meter Victoria Cross over station development will be delivered in partnership with the Australian Prime Property Fund Commercial. Post balance date, we established an investment partnership with Mitsubishi Estate to deliver the first residential tower at One Sydney Harbour, Barangaroo South. We also made significant progress on a number of existing investment partnerships. Two residential for rent buildings at London's Elephant Park were put into delivery through our existing partnership with CPPIB. In Chicago, 3 buildings at Lakeshore East and Southbank comprising both apartments for sale and rent commenced delivery. The retail and residential components of Paya Lebar Quarter, Singapore were completed, marking the combination of the 4-year development with the precinct now contributing $3.3 billion in funds and assets under management. The listing of the Lendlease Global Commercial REIT in Singapore demonstrates the support for the group's global fund and asset management experience. We were selected by TCorp, the investment and financial management partner of the New South Wales public sector, to manage a $2 billion diversified property portfolio. Continued origination success during the year has resulted in the development pipeline more than doubling over the last 5 years to $113 billion. The group added 2 new major residential-led urbanization projects to its portfolio: Thamesmead Waterfront in London and a partnership with Google in the San Francisco Bay Area. These residential-led projects have a combined estimated end development value of $37 billion. I will now hand over to Tarun.

Thanks, Steve, and good morning, everyone. Turning to our financial performance for FY '20 on Slide 11. Core operating EBITDA was down 62% to $563 million. Performance in the second half of the year was down significantly across the core operations as our 3 segments experienced a substantial deterioration in operating conditions as a result of the pandemic. We've highlighted the extent of that deterioration on the slide. We had a solid start to the year with core operating EBITDA of $628 million in the first half, but that was followed by a $65 million loss in the second half. Development EBITDA declined by 59%. The full year result of $322 million comprised $272 million in the first half and $50 million in the second half. The final development profit on Paya Lebar Quarter was recognized following the completion of the retail mall and apartments. The establishment of an investment partnership for the delivery of the Victoria Cross Over Station Development contributed $123 million pretax, including the valuation uplift on the group's remaining 75% interest in the partnership. The forward sale of the first 2 buildings at our Milano Santa Giulia project, part of the investment partnership for the entire project, generated $64 million pretax. While these were all encouraging outcomes, we experienced delays in the conversion of a number of other opportunities across urbanization projects in the second half due to the impact of COVID-19. This included the potential further progress at Melbourne Quarter, Barangaroo South in Sydney and International Quarter London. One of these opportunities, as noted by Steve, has already converted in the early part of FY '21 with the establishment of a partnership to deliver the first residential tower at One Sydney Harbour, Barangaroo South. We expect this to contribute approximately $145 million to EBITDA in FY '21. Construction has commenced with approximately 80% of units by value presold. There were 2,236 apartment settlements and completions in the period. They comprise 1,366 apartments for sale settlements, mainly from urbanization projects in Boston, London, Melbourne and Singapore, and 870 apartments for rent completions at projects in Boston and Chicago. The default rate on apartments for sale remained below 1%. There were 1,898 land lot settlements across the Communities portfolio, down 25% on the prior year. We had originally expected an improved second half but the onset of COVID-19 had a material impact on the trading performance. The Construction segment delivered EBITDA of $101 million, down 52% on the prior year. The entire profit was generated in the first half FY '20 with the impact of COVID-19, resulting in a breakeven result in second half FY '20. The COVID-19 impact was greater in our international regions, particularly in cities where mandated shutdowns were implemented. This included lower productivity, projects being put on hold and delays in the commencement or securing of new projects. This led to losses in the second half for the Americas, Europe and Asia. These declines offset the profit in Australia, which delivered a solid EBITDA margin outcome of 3% for the full year despite the challenging environment. The Investments segment delivered EBITDA of $140 million, comprised of a $255 million contribution in the first half followed by a loss of $115 million in the second half with COVID-19 having a significant impact on real estate valuations across the group's investments. Ownership earnings was significantly impacted by a net reduction in valuations on a pretax basis of $188 million, comprising $23 million of gains in the first half, followed by $211 million of devaluations in the second half. There was also some impact on investment income. EBITDA from operating earnings and investments was $198 million, up substantially on the prior year, driven by a significant performance fee upon the completion of Paya Lebar Quarter in Singapore. This further skewed earnings to the first half. The adoption of the new leasing accounting standard, AASB 16, triggered a reclassification of operating lease expenses to finance costs and depreciation with a net cost to the P&L of $11 million pretax. In terms of composition, there were both low operating and corporate costs with an associated rise in depreciation and amortization and finance costs. Group services costs of $129 million include redundancy costs and our investment in digital. Net finance costs, excluding the AASB 16 were up 2% with higher average net debt more than offsetting a reduction in the average cost of debt. There was a small income tax benefit for the core business in FY '20, which included the impact of Trust earnings and recognition of tax losses. Moving now to Slide 12. The chart provides an overview of the major movements in net cash flows during the year and a longer-term view on historic cash conversion. We commenced the year with $1.3 billion in cash. Underlying operating cash flow was $762 million. The major operating cash inflows during the period included apartment settlements across our Development projects and $588 million from presold apartment revenue through the PLLACes program. There was also a PLLACes transaction of $220 million that matured in the period relating to apartments at Elephant Park. Adjusting for the noncash impact of the $525 million of Engineering exit cost that is adding that back to EBITDA, cash conversion in FY '20 was 175%. The devaluations in investments detracted from EBITDA but not cash flow boosted the cash conversion. Underlying investing cash outflow was $810 million. The major contributors included capital invested in establishing the Lendlease Global Commercial REIT with a 25.3% interest and additional equity commitments in rising Development inventories as we convert the Development pipeline into production. Net cash inflow from financing activities, including other adjustments was $504 million. The $1.2 billion of equity raised more than offset the decline in borrowings and the total distributions paid in the year, representing the final distribution for FY '19 and the interim distribution for FY '20. We closed the period with a cash balance of $1.6 billion. However, that included $451 million of cash and cash equivalents that have been classified as assets held for sale on the balance sheet. This is the approximate amount of working capital cash that will transfer to Acciona on completion of the sale. Cash flow conversion, that is underlying operating cash flow to EBITDA, has averaged 102% since FY '16 adjusting for the Engineering exit costs expensed in FY '20. Looking now at the group's financial position on Slide 13. The group entered the new financial year in a strong financial position with $5.8 billion of liquidity and gearing of 5.7%, below the 10% to 20% target range. The decline in net debt to $0.8 billion down from $2.3 billion at the half year and $1.4 billion from the prior year was driven by the equity raised with strong underlying operating cash inflow offset by underlying investing cash flow -- cash outflow during the year. Invested capital across both Development and investments was largely unchanged. The interest cover ratio declined to 2.8x as a result of the second half loss. The average cost of debt declined to 3.4%, while average debt maturity is 4.2 years. We expect gearing to rise to the lower end of the group's 10% to 20% target range during FY '21. Outside of core business operations, we expect the sale of the Engineering business to result in an approximate 3% increase in gearing on a pro forma 30 June 2020 basis. In relation to the cash flow impact of the $525 million in exit costs expensed in FY '20, we expect that to be incurred over the coming 5 years. Turning now to our core business performance for the period against the portfolio management framework targets on Slide 14. Hopefully, most of you are aware of our upcoming strategy update on 31 August. As part of that, we'll present our revised portfolio management framework or PMF targets. The impact of COVID-19 in the second half of the year has distorted many of the PMF targets in the year. Devaluations in the Investments segment was the largest driver of the EBITDA mix, resulting in a lower contribution from Investments and higher-than-target contribution from Development. The segment-invested capital mix continues to be weighted towards Development, reflecting the significant amount of development activity that is underway. We expect to reweight to Investments over time. The continued implementation of our international gateway city strategy has resulted in a reduction in the proportion of capital allocated to Australia in recent years. That allocation is currently 42% with Asia, Europe and the Americas all sitting at around 20%. Returns across each of the segments were well below target. Looking now at Slide 15. As a group, we are focused on delivering consistent returns over the longer term for our security holders. While we never plan for a pandemic, we have been able to absorb the near-term shock and deliver 5-year returns within target ranges for each of the 3 operating segments. Development has been at the lower end, Construction around the midpoint and Investments towards the higher end. This has translated into a core business return on equity of 10.8% over a 5-year period. While the group will be required to continue to navigate near-term uncertainty, we believe the foundations are in place for the core business to continue to perform over the medium to longer term. I will now hand back to Steve for an operational update.

Thanks, Tarun. Turning to Slide 17. 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 a leadership position in creating urban precincts. Today, we have 21 major urbanization projects. We've secured a great pipeline and are working hard on enhancing our operating structure for success across a scale platform. We'll provide more detail on that at our strategy update on 31 August. 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 18 and focusing on apartments. The pivot towards international urbanization projects in recent years is producing results as these projects move into delivery. It has also provided diversity by product with our expansion into residential for rent a real success story for the group. FY '19 marked our first completions for this asset class with completions almost doubling in FY '20 to 870 units across 2 projects. The profit on the Clippership Wharf units in Boston was recognized when the development was sold into the U.S. residential partnership on establishment in FY '19. Profit on the units at 845 Madison in Chicago was recognized following practical completion in the period, although we expect further uplift upon rental stabilization of the asset. Almost 1,000 additional rental units were put into delivery at our projects at Elephant Park, Southbank and Lakeshore East. With these units being developed in our existing U.K. and U.S. investment partnerships, very little profit was recognized in the period. Most of the profit will be recognized on completion with development management fees recognized through the development phase. Of the 56 apartments in the pipeline, more than 1/3 are apartments for rent. Turning to our commercial performance on Slide 19. As noted earlier, delays across our projects impacted the financial performance in the period. The investment partnership with the Lendlease-managed APPF Commercial fund to deliver the Victoria Cross Over Station Development, was formed in the first half. While the partnership with PSP in Milano Santa Giulia was established in the second half. The retail mall at Paya Lebar Quarter in Singapore, an additional office building in International Quarter London and the final office building, Daramu House at Barangaroo South in Sydney, were the 3 commercial buildings to complete in the year. There are a further 7 major commercial buildings in delivery with an estimated end value of $5.8 billion. While we are experiencing uncertain times, there is a significant amount of conversion opportunities. Nearer-term commercial opportunities include Melbourne Quarter, International Quarter London, TRX in Kuala Lumpur and 30 Van Ness, San Francisco. Moving now to the remainder of our Development segment on Slide 20. The Australian master plan communities portfolio had a tough year with less than 2,000 settlements. The first half was characterized by soft market conditions and a lack of titled stock, most notably in New South Wales. Green shoots, which emerged as we headed into the new year gave way to weaker trading conditions following the onset of the pandemic. Inquiry levels have recovered with government stimulus measures supporting increased demand. While there are some encouraging signs and we expect an improvement from FY '20, settlements are likely to fall short of the target settlements of 3,000 to 4,000 lots in FY '21. Moving on to the Construction segment on Slide 21. While the second half was challenging, we completed a number of significant projects during the year. For external clients, these included several defense projects, commercial buildings at Wesley Place Melbourne and 60 Martin Place, Sydney; redevelopments at Kambri Precinct at ANU, Canberra and Rod Laver Arena, Melbourne and a residential tower at 220 Central Park South, New York. Construction on a number of integrated projects was also completed, including 845 West Madison, Chicago; Cedarwood Square, Deptford Landings in London; and Paya Lebar Quarter in Singapore. New work secured of $7.5 billion was down from $9.9 billion in the prior year. Origination was impacted by lower activity in the Americas, most notably the key New York market and some delays in projects being brought to market, along with limited new work in Europe. The Australian business proved resilient, with new work secured only marginally lower at $4.3 billion. The workbook remained substantial with backlog revenue of $14 billion. Approximately 75% of major project backlog will generate future revenue and margin for the Construction segment with margin on the remainder that is derived from integrated projects being reported through the Development segment. Moving to Slide 22 in our Investment segment. Firstly, looking at operating earnings, which are derived from our fund and asset management platforms. The completion of Paya Lebar Quarter, which exceeded our financial and nonfinancial targets and subsequently generated a significant performance fee, underpinned strong growth in earnings. A small increase in base management fees was in line with higher average funds under management. Future investment earnings will be supported by the 2% growth in funds under management to $36 billion. Additional funds under management of $4 billion was underpinned by the launch of the Lendlease Global Commercial REIT, progress on several commercial buildings that are currently under development and strong growth in residential for rent. This was largely offset by $2 billion in divestments, which included the partial satisfaction of redemptions in APPF Retail and $1.4 billion of devaluations. The group has $29 billion of assets under management across the commercial and residential sectors. The group added residential for rent to the asset management platform for the first time. Our retail asset management business has been working with retail partners as they navigate through a difficult period with retail malls and centers experiencing restricted trading since the onset of COVID-19. Turning now to Slide 23 and our ownership earnings, which are derived from our $4 billion of investments. We recorded a loss of $58 million compared to EBITDA of $345 million in the prior year. Tarun has already outlined the impact of the reduction in valuations. At a sector level, though we're concentrated in the co-investment positions in the retail funds platform in Asia and the Retirement Living business in Australia. The trading performance of the Retirement Living business was solid with 874 resales across the established village portfolio, up 3.8% on the prior year. However, a modest decline in average prices and delays in development activity, which was affected by COVID-19, impacted the carrying value of the entire portfolio, offsetting the underlying trading performance. We will continue to look to grow and recycle our investments to maximize risk-adjusted returns. Moving to Slide 25. While the near-term outlook will remain influenced by the pandemic, the group is well positioned to withstand any further dislocation and respond to opportunities that arise. Our financial position is strong, and we have the capacity to accelerate the delivery of the development pipeline. We now have a deep track record in creating great places, which deliver strong results for our investment partners. This gives us confidence in our ability to fund and deliver our outstanding pipeline. We look forward to providing more detail on how we intend to do that as well as increase our investment exposure at our strategy update that will be held on 31 August. As we emerge from the pandemic, companies that have both the financial strength to navigate the downturn and capability to capitalize on opportunities as they arise will outperform. We are well placed to be one of those companies. Before we open up for questions, I'd like to conclude by recognizing the unwavering support and commitment of the people of Lendlease: to each other, our customers and to the strength of our organization. Our people have drawn on the resilience, adaptability, focus and care that have long been hallmarks of our business to steer us through an extraordinary operating environment. We'll now move to Q&A. 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 Stuart McLean from Macquarie.

First question is just in regards to the outlook. You mentioned that earnings to remain impacted by COVID in the near term. Are you just able to unpack this a little? Is this more in regards to Development, Construction? And maybe a comment specific on Construction. Just given new work, one, actually was greater in 2 half versus 1 half. So just looking to understand revenue path in that Construction business over the next 6 months.

Yes. So difficult to be definitive, obviously, on the impacts of the pandemic. So we are calling out that clearly, as we continue to work through that, it's likely to impact the first half. Across our different businesses, what I would call out is that in our Development pipeline, we have a number of significant conversion opportunities over the next couple of years like Melbourne Quarter Tower, obviously, Melbourne; 30 Van Ness in San Francisco. There are 4 buildings in IQL in London, the Milan Innovation District, Deptford residential for rent. We've got Google residential for rent emerging and moving in the right direction and Elephant Park as well. So there are a number of those conversion projects in the pipeline over the next 2 years. Difficult to be precise, obviously, on when they land. But what I can say is we continue to make very good progress both on approvals and on our discussions with investment partners. On your specific question on Construction. The first half is likely to continue to reflect some of the impacts of COVID. We've got a bit of a lower opening backlog, slightly subdued new work secured. Obviously, Australia, as I called out, did pretty well, only a marginal impact on the work that they won during that period. So we do expect an improved performance for Construction over the year, but first half likely to still be feeling a bit of the effects of COVID.

And maybe just a follow-up on Development there. Saying conversations continue to progress with capital partners. Just wondering how that has changed, if anything, potential structural headwinds in office, in the U.S. hearing urban flight away from high density. Does that impact -- did any of those 2 impact either office or build-to-rent aspirations?

Yes. I think just an overriding observation on the outlook and the likely impact on asset values and investment. And we -- as you would expect, we have a very broad base of institutional investors that back our product, and we're in regular contact with them to assess how they are thinking about the market. And we have pretty good indications as to what they're interested in and what their likely time horizon is for investing. On the overall trends, clearly, there are some -- there will be shifts in human behavior. Some of those will be temporary, others will be more longer lasting. I think it's premature to be too definitive. The way that we think about our business is that, clearly, we're focused on a gateway city strategy. There's no doubt that cities, as a component of society and the way that we interact, will continue to be very relevant and they will continue to be the cornerstone of human activity. And our gateway city strategy is based on the resilience that those cities do demonstrate, and history suggests they absorb shocks more readily and they recover more quickly. So our business model is clearly designed, when you couple that with the land management model that we pursue, clearly designed to be more resilient through cycles. Then when you look at the individual sectors, there's a lot of conversations around beds in sheds being clearly attractive. Industrial is not a component that we're strong in. But in the residential side, I've called out our shift to residential for rent. I think that's been a very good strategic move for us over recent years. We have about 19,000 apartments in residential for rent that are currently in our backlog. So they will play very well, and there is continuing strong demand from our investor base for that product. And the demand will be there for quality product. And as we -- as affordable housing becomes more of an issue, we think that will play even stronger to the residential for rent sector. In office, a lot of debate around what the likely impact on human behavior and the way that office space is utilized. But frankly, in our view, there's -- that's probably more of a temporary situation than permanent. There's increasing recognition that the need for social interaction, the need for the innovation that you get from working together is strong, and we certainly hear that feedback from our investors. One of the things we do think will emerge is potentially a bit more of an approach of a hub-and-spoke style model. And as you probably know, we were already heading down that path with our office in Manly, for example. We think there might be more opportunities that people look for there. And there will be repositioning of assets as well. We've got very strong sustainability credentials. We think that will play very well. We also have expertise in innovation around work space and the way that you design the office of the future. So we think that, that will play well. And certainly, the conversations we're having with investors support that as well. Retails, the obvious sector that continues to be challenged, but there will be opportunities for mixed-use conversion. And you're seeing some of those opportunities already emerge in the form of fulfillment centers or in remix to a mixture of commercial and residential as well as retail. So I think the strengths that we have in place-making, in looking at precinct-wide solutions, mixed-use capability and our diversified exposure across a range of gateway cities and projects puts us in a pretty strong position to respond better than most to the likely changes in behaviors that will emerge.

My second question is just on Engineering. The sale proceeds seems to have fallen from $180 million to $160 million. Just what are the completion adjustments? And then how material could they be?

So the 1 -- the reduction to $160 million is really through the passage of time. We've actually continued to collect profits from the performance of the business over that period. So that's had to be adjusted. Completion adjustments, so there's always adjustments on completion for the final working capital numbers. And we don't think that, that will be that material. And clearly, it doesn't change the sale price itself.

And just on the exit cost of $550 million. How much has been taken in cash to date? And secondly, has your confidence around that number changed since early July?

Yes, Stuart. Not a lot of that has been taken in cash. There was in FY '20, just some selling costs that were cash flowed. But as we said in our speech, most of that will flow through over the next 5 years.

Is it forward -- should we expect a fair chunk of it in FY '21 given that, that's when the sale to Acciona settles? Or is it more trailing and potentially to do with other projects?

Yes. So in FY '21, Stuart, the way to think about the cash is the $160 million of cash inflow from the sale of the business, there is that net working capital that transfers to Acciona, which is we called out about circa $450 million. And there might be some contractual balance sheet adjustments, but that's how you think about FY '21. But then the rest of it, which is still the $525 million provision to go is really over the next 4 to 5 years. And I think that's all I can say rather than go into probably straight-line assumptions as best to guess at this point.

That's great. And maybe one final one for me. Previously, you said you do about $4 billion per annum for urban regen completions. Just looking at the commercial commentary for the outlook, you're saying there's 26 opportunities over FY '21 to FY '23, that points to significant growth there. Just wondering if you would give some sort of guide on where you think completions could go in a 2-, 3-year view.

Yes. We've spent a lot of time looking at both the timing of putting projects into production and the progress in relation to funding of those projects. We intend to address that in some detail on the 31st of August at our strategy update. So we'll be trying to give you a better steer to the likely rate of production over a period of time.

Your next question comes from Ben Brayshaw from JPMorgan.

I was wondering if you could give an update, please, on the TRX project in relation to the retail. Steve, you mentioned on the call last month that you would be perhaps in a position to put a bit more color around the completion date and how the leasing is going.

So TRX continues to progress quite well. There have been delays, as you would expect. So it's likely to slip into FY '23 in terms of completion. So that's where we are on the project. In terms of retail tenancy precommitments, we continue to progress well. And we have, in fact, moved forward on commitments with a number of major tenants in the last 3 to 4 months. So obviously, things have slowed a bit, but progress continues to be pretty strong. On residential, as I think we called out earlier, we've achieved more than 50% presales pre a public launch, which is also encouraging. So I note that Malaysia has had a tough last quarter as have a lot of Asian countries, obviously. But in terms of the outlook, we think Malaysia is probably going to outperform in the Asian markets over a period of time.

Steve, it was a press article that I think quoted Tony as saying that completion, this was in January, was scheduled for December 2021. You're saying FY '23. So I mean, is it correct to assume that the completion is being deferred by 6 to 12 months?

In the order of where we were initially, I think that's not an unreasonable conclusion. So it's going to slide into FY '23. And we're obviously working hard to try and get it done in the first half of '23.

And sorry, just 1 follow-up question on TRX. I can see the end value has been revised to $3.6 billion, and the build form now includes 170,000 square meters of commercial space, that's up from 120,000 square meters 6 months ago. Could you talk about the difference there? What's driving that? If there's been a variation to the scheme or whether you've revised your estimate of end value?

There's been quite a bit of progress now on both the design of the retail and the commercial precinct. We've just signed an arrangement with a tenant -- or an operator, I should say, on the hotel asset as well. So I'll come back to you with an exact breakdown of that commercial space post this presentation, if that's okay.

Yes, no worries. And moving on to Melbourne Quarter, I was wondering if you could just give an update on Melbourne Quarter East Tower, the 720 units. How many of those have been settled as at 30 June? And how you're progressing just in relation to either settling the outstanding units or potentially looking to cash the deposit and take them on balance sheet?

Yes. Ben, it's -- we settled just over 300, I think of the 700-and-something units in Melbourne Quarter, that major tower. And now the team's progressing with settling the rest in this first half of FY '21. We -- the first 300 settled quite quickly. And again, I think the last sort of 10% to 20% are the buyers where we'll need to just work with. A number of them are foreign buyers in terms of inspections and getting finance and working through that, but that's where we're at the moment and settlements are progressing on that tower.

Your next question comes from Sameer Chopra from the Bank of America.

Hope you're all well. Just had 2 questions. So really nice to see that deal with the Mitsubishi Estate. Could you maybe walk us through the kind of mindset out there? Are you getting a lot of inbound inquiries from capital partners? I was just keen to get a sense around where capital partners sit right now. And then secondly, just in terms of funds under management. From 30 June onwards, have you seen any further withdrawals? Or has that market stabilized right now?

Yes, Sameer, I think your question -- the first question was relating to One Sydney Harbour, the deal we signed with Mitsubishi Estate, which was our third deal with that repeat client. So we were very pleased about that. And in terms of more general appetite from capital partners, as Steve mentioned, we have quite a number of projects that are -- have planning, and now we're looking for tenants and capital conversion. And all our blue chip capital partners continue to be quite interested in our pipeline. I think those well-located, good quality projects that we have continue to have demand. I think more generally, capital partners are, especially the large ones are -- there is a lot of capital still out there for real estate. Clearly, at the moment, there is a bit of caution given COVID environment and probably most of this calendar year, a lot of capital partners on other more opportunistic deals are taking a wait-and-see approach. But as I said, on our pipeline, as demonstrated in the last few months, we've converted $7 billion of investment partnerships across Victoria Cross, Milano Santa Giulia and One Sydney Harbour and we've got other discussions underway. In terms of your funds under management, yes...

Yes. So the question you asked was on withdrawals. The way that it works across our funds platform, generally speaking, is there are redemption or liquidity windows that occur in specific periods. APPF Retail is in the process of one of those. And they have obviously been -- it's not a great time to have a liquidity window on retail at the moment, so we've been working through that. There was a significant amount of redemptions. What is currently happening is that there is a notice of meeting that's gone out to seek a revised redemption window, which will be in front of investors towards the end of this month, and investors will determine if that's the approach they want to take. So there's not, in that sense, additional withdrawals. It's not -- they're not liquid from that perspective on an ongoing basis or on a day-to-day basis. So from that perspective, no additional withdrawals. The other thing I'd say is funds have actually increased in terms of what we have under management because TCorp awarded us a mandate. It's about a $2 billion mandate. So I think what we've referred to in our funds management, there's a net increase in funds coming through that offset by a decrease through redemptions and revaluation.

Steve, can I just clarify that the TCorp transaction, was that pre 30 June or was that after 30 June?

After 30 June.

Your next question comes from Sholto Maconochie from Jefferies.

A lot have been asked, but just on the Engineering, the cash component of $525 million, given you've got the 2, NorthConnex and the Kingsford Smith Drive coming this year, is that mainly to cover the indemnities and warranties on those projects and the Melbourne Metro legacy to give you a bit of buffer on that project? Can you give a bit of color around that?

Yes, Sholto. So yes, the KSD and NorthConnex are almost complete. So there's not any significant amounts to go on that. The $525 million to go is really provisioning for completing retained projects, which Melbourne Metro is the most substantial one, but also our assessments of the contractual obligations over the next 5 years in terms of potential indemnities, normal repairs and maintenance claims that we're getting cost to exit the business. So it's all of those things that's reflected in that number to be expensed over the coming 4 to 5 years.

Yes, that's what I thought. And then just on Communities. Obviously, you flagged it at the half year that it's below the target and there's a production in the first half. Some of your peers have had pretty strong presales in June, which will probably come into this year. How are your June presales in Communities? Did they bounce back strongly? Can you give a bit of color there?

Yes, Sholto. Yes, we've seen a similar bounce back, clearly on the back of low interest rates and the government HomeBuilder grant, we have seen a similar increase. Our inquiries were up about 40%, circa 40% in June. That's continued in July. So there is a short-term bounce coming through, which is very welcome, and it's across most markets at the moment. So certainly, the government stimulus and the pent-up demand is helping that sector at the moment.

And then since we talked last, the government of Sydney as well announced a change in the land tax for build-to-rent. Obviously, we're seeing a concession. Does that change your view on build-to-rent in Sydney given, Steve, that you've got offshore in that asset class?

Yes. Look, I'd say that there's a lot of momentum around federal and state government initiatives to try and improve the outlook for the residential for rent sector. Clearly, an increasing focus on the affordability of housing in general. So we think that augurs well for that precinct. We've said previously that the return profile for the residential for rent asset class outside of Australia was more attractive, and we were focused on that initially. We now see that moving in a direction where it will likely be commercial to pursue those opportunities in Australia as well. So we are very much focused on that.

Great. And then just finally, on Services that's being paused. Is that more we just should think sort of more second half '21 before that sort of we looked at it again? Would that be fair?

We haven't actually put a time line on that. I guess our perspective is we need to navigate through COVID. There's a lot of other priorities for us to work through at the meantime, and then we'll assess that as we reemerge from the pandemic.

[Operator Instructions] Your next question comes from James Druce from CLSA.

Just a question, firstly, on the build-to-rent. Just on your outlook statement, you sort of lifted the run rate from '21 to '25 to 4,000 units from 2,000. Is that just really Thamesmead and Google coming in or are there any other drivers there?

Yes. James, there's a number of projects in build-to-rent that we're working on. I think the ones I would call out more in the next couple of years are Deptford, Elephant Park in London. We've got both Milano Santa Giulia and MIND projects have build-to-rent components, and we think that they would be looking good for conversion. And then the other most substantial one clearly is our Google project in the San Francisco Bay Area. We are starting to get some good traction there in terms of getting planning and entitlement for that project, and that's very significant. As you know, there's about 20,000 -- sorry, in value of $20 billion of predominantly build-to-rent product, and there's a very significant demand in that market. So those are the nearer-term ones. And then beyond that, also, we have Silvertown and Haringey are the ones I'd call out. Thamesmead is in more the 5- to 10-year period. And so is Houston because of preplanning works and other entitlements that those projects are required to have.

Okay. And just profit recognition on San Francisco. Do you still -- do you have an update on where you think that will be?

Yes. It's -- I'd say, we're working very, pretty hard to get going on that project and so is our client. I think I'd say over the next 24 months would be a good outcome. And again, pointing out, James, that in build-to-rent, we have a partnership with First State Super and the U.S. is performing well. That's almost fully invested. There is more demand from that client. And of course, build-to-rent is a very attractive sector in most of our markets. And as you know, we are able to book profits on sell-down. So as soon as we get entitlement ready to start, we should start to see earnings emerge in that sector.

Okay. And maybe just an update on conversion of some of the commercial developments. Can you just talk to IQL and Melbourne Quarter and 30 Van Ness? And sort of how soon you might be able to get those ones going?

Yes, James, all 3 of those projects that you called out have planning approvals. So that's usually our biggest hurdle. But Van Ness; IQL, the next building; and Melbourne Quarter have planning approval. Now we're really in tenant precommitment discussions, and there is capital partner interest given the high quality of those projects. So it's really the timing of conversion and commencement will depend on really now precommits and capital partner discussions coming to fruition.

Yes. It's more the tenant demand in those markets. I'm just wondering if you could provide -- I mean if you look at sort of Melbourne, for instance, it does look like a tough market at the moment. So if you could just comment maybe on tenant demand in some of those markets?

Yes. Clearly, in the middle of COVID, there is more subdued demand, as you would expect. But suffice to say, there is continuing interest in our projects as demonstrated in our Milano Santa Giulia project. Only a few weeks ago, we signed the AFL and commenced the 2 buildings. So selectively, we are seeing demand from tenants who are looking for the new generation workplaces, highly sustainable and flexible design and in projects where -- our projects are located next to good public transport, but also very large floor plates, and again, modern design available. So there is selective demand that we're still working on. Clearly, with COVID, it takes a bit longer to convert.

Okay. And one maybe just on the strategy update coming up. Obviously, you're not going to reveal too much today. But do you sort of see that as more of a tinker or more of a rethink of the business model?

Yes, I think the -- what I would call out is there's been a lot of work done on this over an extended period of time. And that work had already commenced pre COVID emerging. We continued with that. And I think we had flagged some time ago to the market that we were revisiting our rate of production. In addition to that, we've also looked at how we get to the preferred mix of earnings in terms of recurring earnings and boost our growth in the investment management component and the co-investments that we invest in alongside that. So there'll be quite a bit of discussion around those 2 things. Clearly, digital is part of what we're also driving to deliver. That is something we've spoken about previously. We're making good progress there. And a large part of that is about driving productivity and driving better results from the projects that we already have. So we'll be talking about those issues in 2 weeks' time. So we're not departing from our gateway city strategy. We still see that as the cornerstone of what we do, the resilience of those cities, the differentiation we bring through urbanization and place-making on a mixed-use basis. That's the cornerstone of our strategy. And it's really about how do we accelerate the delivery of returns for shareholders from that pipeline as the primary theme.

Okay. Actually -- and just 1 more, if I may. Just the working capital number for Melbourne Metro?

Yes. It's, James, about circa $200 million, $250 million, in that range.

And your next question comes from Tom Bodor from UBS.

Steve and Tarun, just wanted to follow up on the inventory impairment, that was -- the $30 million impairment. I just wanted to understand how many projects that was across and was the intention there to write those projects down to 0 margin or was it allowing for sort of just a wholesale global disposal of those projects?

Yes. Tom, as you would be aware, we've highlighted this before, we run comprehensive CAA updates every 6 months across our development book. We did that at 30 June, which led to that sort of small impairment. It wasn't across a number of projects. It was really about 2 to 3 main areas. One was relating to some of the retail that we hold as inventory under our urbanization projects. Clearly, retail, as you know, has been challenged because of shutdowns. So we took some impairment there. And then the other most -- other component was the exit of our U.S. energy business. We are looking to exit that business. So we took a provision for cost and exit costs there. So they were the 2 main components in that inventory impairment.

Okay. And then on the Retirement business. Just wanted to understand, there was sort of also mention there of development inventory reductions, although that would sit in the JV presumably and also some slight price softness. Can you just talk to how much that price softness assumptions changed by? And how much of the negative result that was driven by the Development side?

Yes, Tom, 2 things you've called out are the 2 key contributors for that impact. The larger one was the price growth. As you'd be aware, there are price growth assumptions, long-term assumptions, but then the valuation works on the current market value of our units compared to what's happening in the local trade area. Clearly, with the softness that emerged, particularly in the second half, we had some CMV declines in the order of, not material, 1% to 2%. But when you're budgeting for growth in a model and that turns negative, it has, in that year, an impact. So that was the larger component. And then similarly, on the development inventory, clearly, with soft market conditions, we haven't -- our sales are down. And then when we ran the DCFs on that, again, we provided for that DCF impact coming through because of pushing out of development sales.

Okay. And then just one last question is if we're going to be sort of in and out of shutdowns, I just wanted to understand how things might be different on the Construction side if you do see sort of further shutdowns as a result of the second wave. How will you do things differently now that you're presumably anticipating disruption and dislocation versus, I think, the first time where it wasn't reasonably forecastable?

Yes. So I think the answer to that question is, as you alluded to, we're obviously much better prepared now than we were at the commencement of this, having worked through the social distancing protocols that are applied in the various different markets, and they do vary depending on which city we're in. If you look at the most recent shutdowns in Melbourne, obviously, one of the key things was 25% of workforce at commercial sites that weren't regarded as exempt sites. So some of the major projects like Melbourne Metro are exempt sites. They're operating under COVID-19 guidelines but they're operating at almost full capacity. But the sites that are at 25% workforce. We've been working closely with government on flexibility around shift work, et cetera, to try and increase the productivity levels. The thing that I would call out is that our teams around the world have done an incredible job of introducing the flexibility required to continue to be productive whilst maintaining safety. So across our entire project base globally, we haven't had any fatalities from COVID. And we've had a reasonably small number of infections as well. So in Australia, I think in total there have been 23 infections across our entire business, and that includes Lendlease employees and subcontractors in total. So I think that's been an incredible effort and demonstrates that the protocols do work and that we have been able to continue operating. So hopefully, that puts us in good position to still drive performance albeit in a restricted way if there are further waves around the world.

And do you have a -- for new work that you're winning, are you allowing for COVID in that work? And equally with the stuff that you've already won, historically, have you renegotiated them to cater for it with the client?

Yes. So overall, I'd say there's been a very good level of cooperation between our customers and contractors. We're seeing that in our business and other businesses as well, recognition that this is a shared problem. So we're working through those things in relation to existing projects. And certainly, in relation to future projects, we've been very clear on not taking the COVID risk as a contractor.

Thank you. There are no further questions at this time. I will now hand back to Mr. McCann for closing remarks.

Thank you. I just want to clarify 1 question that was asked earlier, which I don't think I answered particularly well. We'll still come back with clearer details. But just on the TRX project and the increase in commercial space, as I said, there has been progress made across the precinct redesign of some parts, the retails contributed to that. But in addition, there is there's an additional plot at the gateway of that project that we had always in our sites, but we hadn't got approval for with government. And as with the rest of the plot, we're 60% of that, 40% with government. That has now been included. So that was a large driver of that lift you would have seen from 120,000 to 170,000 in commercial. It's a combination of residential, small amount of retail and potentially a hotel. So I thought I'd just clarify that while I could. So thank you, everybody, for joining us. Obviously, very challenging times. But as I said, I'm very proud with the way our teams have worked through these challenges, and we have a fantastic pipeline ahead of us. So looking forward to delivering on that pipeline in the years to come. Thank you.