Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lendlease strategy update. This call will be hosted by Steve McCann, Group Chief Executive Officer and Managing Director; and Tarun Gupta, Group Chief Financial Officer. [Operator Instructions] I must advise you that this call is being recorded today, Monday, the 31st of August 2020. I would now like to hand the call over to your first speaker, Steve McCann. Please go ahead.

Good morning, and welcome to the Lendlease strategy briefing. 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. Today, I'll provide an overview of Lendlease's strategy; and then hand over to Tarun, who will talk through the financial strategy. I'll then wrap up before opening the line up to questions. Turning to Slide 4, strategy highlights. Over the next 10 years, we will focus more on what we do well by expanding and upweighting those parts of the group that have the greatest potential to drive securityholder value. Our proven track record of delivering urbanization projects across targeted gateway cities that generate superior economic, social and environmental outcomes is proof of our placemaking capabilities. Another key marker of competitive advantage is our end-to-end capability across all aspects of real estate from concept and planning to design and delivery, through to funding and investment management. I want to emphasize here the significant barriers to entry established through our strategy over time. Many of our competitors have emulated aspects of this strategy, but none can match the track record, end-to-end capability and the significant investment we have made in building global relationships. This is what has led to the strength of our current $113 billion global development pipeline, as our customers and partners trust our ability to deliver long-lasting value. It is also what will underpin the next decade. We can be selective on what we seek to add to the pipeline. We believe our mixed use capability will emerge in an even stronger position following the varying impacts that COVID-19-driven changes in human behavior will have on sector-specific expertise. It is also true that the best people are attracted to the best projects and opportunities, and our current pipeline includes some of the most attractive placemaking projects in the world. We are focused on the areas of the highest return in our Development and Investments portfolios, and we'll be prioritizing our capital and people resources towards these areas. We have developed pathways to accelerate the delivery of our current $113 billion development pipeline. We have confidence that the planning milestones we have already achieved, along with detailed analysis of both market absorption and investment partner appetite, will enable us to target more than $8 billion of completions per annum. That is an increase of more than 80% on our historical completion rate. The current pandemic has obviously slowed us down a little, but we already have enough work in progress to be confident of hitting this target, and Tarun will spend more time on how we expect this to drive earnings. The more than $50 billion of investment-grade product that we expect to create from the development pipeline provides a significant opportunity to materially boost our Investments platform. It also provides a strong base for future annuity earnings. We have the appetite and global capability to pursue the launch of new products and market growth opportunities alongside investment partners. Numerous partners are currently resetting their own strategies. Our privileged position of dialogue with them strengthens our capacity to tailor new products to meet the emerging demand. These initiatives should provide much higher annuity earnings. Moving to Slide 5. Let me emphasize again that, going forward, we will be very focused on our core capabilities. We acknowledge that our participation in the engineering sector has been costly. We were very strategic about the opportunity to add significant positive cash flow and earnings in a booming sector which was adjacent to our core contracting capability. However, the risk profile of that sector has become fundamentally unsound as the scale and complexity of major projects has increased. This is evidenced by the challenges faced by many projects and contractors around the world. We should have avoided those risks and the aggressive competition in the sector, but we did not. We are close to completing the final matters on the sale of the Engineering business and hope to announce completion shortly. I'm proud to say that our real estate strategy has been very sound and well executed. The Board and management of Lendlease are determined to focus on our competitive edge going forward. We do not need to veer off course, and we can be very selective in the opportunities we pursue from here. 10 years ago, we set our new strategy that's centered on the integrated business model, including a pivot to international gateway cities. The results of that strategy are evident on this page. Focusing on key gateway cities, we secured some extraordinary projects, most of which are insulated against cyclical impacts through our capital-efficient land management model. Through our partnership approach, it has driven significant growth in our funds under management. Turning to Slide 6, our global footprint. Mapped here are our urbanization projects with an end development value of more than $1 billion, along with some of our key performance indicators. This slide reflects our very focused city-based strategy: building a diversified portfolio in resilient locations where we have very strong local teams and relationships. We've invested a lot of time and costs in building this footprint, which would be difficult to replicate. We then overlay this with global systems, expertise, risk management and capital relationships to drive superior returns. Moving to Slide 7. We commenced a review of our strategy prior to the onset of COVID-19. Given its pervasive effect, we put the strategy through a rigorous stress test. We assessed the resilience of our strategy under multiple COVID-19 scenarios, specifically testing the fundamental assumptions and proposed strategic shifts that formed our strategy. The scenarios we considered incorporated assessments of the likely extent of change in customer behavior and the depth and length of economic disruption. The analysis reconfirmed our view that the business model is resilient. We believe the business model is agile and designed to ride out market cycles, supported by our land management funding model on most projects. Our gateway city strategy will prove to be robust. History suggests gateway cities absorb shocks more readily and recover more quickly. Placemaking skills provide flexibility and adaptability to respond to changes in consumer and corporate behavior and is one of the core reasons for our origination success. Our pipeline is strongly weighted to residential with a significant proportion of build-to-rent product and commercial offers with very limited exposure to retail. We have depth of talent in our key focus areas of urbanization and investment management. We train and develop our talent. I'm very pleased that 86 leaders have participated in either our comprehensive Urbanization Project Director or Construction Director Programs. This is a deep pool to draw upon to resource our 21 major urbanization projects. Our high-quality relationships have also proven resilient, with our investment partners remaining attracted to our quality product offering. Notwithstanding the COVID-19 uncertainty, we launched new products under existing capital partnerships with CPP Investments and Aware Super and developed new partnerships with PSP Investments and Mitsubishi Estate. Turning to Slide 8. Today, more than half the world's population live in urban areas, and an additional 1.5 million are added to the global urban population every week. Even in the midst of a global pandemic, we do not see this trend materially reversing. Border restrictions and redomiciling of some manufacturing industries may have a short- to medium-term impact on migration, but over time, we still expect gateway cities to experience disproportionately higher growth and to attract disproportionately higher investment in real assets. Technology has been a big winner through this pandemic. We see significant disruption emerging in the real estate industry, and the productivity and quality improvements this can bring will impact most significantly at scale. The major projects we are developing make us a very attractive partner for leading technology players, which will keep us ahead of the curve in adapting to these changes. What will be increasingly important is that cities will need to become more affordable, inclusive, sustainable; and have a greater focus on intuitive and reliable transport links, security and workplace flexibility. By sector, in the residential sector, the need for high-quality, affordable housing with a focus on amenity and security of tenure has driven growth in residential for rent. This growth is evidenced in our U.S. and U.K. operations currently with more than $2.5 billion of product either completed or in delivery in the short period we've been involved in the sector. Structural undersupply remains a factor in major gateway cities. For example, Greater London needs to build 66,000 homes a year, according to the mayor of London, more than double the current figure being delivered. We expect residential to be a long-term outperforming sector. There may be more distributed product emerge, but there is also little doubt that, as economic conditions improve, the market for apartment sales will rebound strongly in the right locations given the scarcity of quality product. In the office sector, our expertise in workplace design and innovation can provide insights that will prove valuable as organizations grapple with the future of the workplace post COVID. We can see more interest emerging in flexible workplace models, including the potential for hub-and-spoke operations. There will also be repositioning opportunities, as tenants want a different type of experience for employees. This will play to our strengths as a leader in environmental and social sustainability and employee health and well-being. Some of our projects such as MSG, MIND, Victoria Cross, RNA and Smithfield will benefit directly from more distributed workplace locations that some businesses may adopt. What is becoming increasingly clear as the varying forms of lockdown drag on is that employees are suffering greater mental health episodes, and organizations are increasingly reporting concerns about loss of innovation and driving problem solving as they struggle with the absence of a collaborative team environment. We see disruption reflected in higher vacancies, which will impact income returns for large office owners in the short term. Asset value should be protected to a degree given the low costs of both debt and equity. Both of these impacts are somewhat artificial. Long term, we don't envisage a structural shift in the desire for high-quality office-based work environments. We are a creator of mixed-use, flexible product, which we will adapt to emerging trends; and we are still seeing strong evidence of demand for our products. In the retail sector, the structural issues that have been a part of the retail landscape are set to remain, but there are significant opportunities for mixed-use conversion given the broader urbanization context retail operations fall into. While our urbanization pipeline has limited exposure to the retail sector, we have already identified a number of assets within our funds platform with attractive footprints in strong demographic areas which we will reposition into mixed-use investments. And we have significant investor interest in this space. I should also confirm that, last week, our investors in APPF Retail voted in favor of a revised redemption process, where the trustee will use its best endeavors to provide liquidity for redeeming investors over the next 3 years. Turning now to our purpose on Slide 9. In FY '20, we undertook extensive consultation with our employees, leadership team and customers to revise our purpose statement. We wanted to acknowledge our rich history and leadership in sustainable and profitable placemaking but to also extend our purpose to more broadly encompass the value we create in partnership with others because no one succeeds alone. Stakeholders, including governments, investors, customers and the communities within which we operate, are increasingly looking for organizations to demonstrate how they are contributing to society beyond a pure-profit motive. Our refreshed purpose statement articulates for our employees and stakeholders why we do what we do. We create social, environmental and economic value by creating great places where communities thrive. We developed our purpose and revised strategy in tandem, as they are linked in intent and outcome. Moving to Slide 10, which highlights our new strategy. Here we encapsulate our refreshed strategy through the focus on 5 strategic priorities: leveraging our competitive edge, accelerating delivery of our development pipeline, scaling up our Investments platform, world's best practice delivery and continuing leadership in sustainability. These are where our competitive edge lies and where we see the greatest opportunity and returns in the future. Slide 11 strongly encapsulates our proud history and proven track record of breathing new life into urban precincts around the world. We create places with our partners that are vibrant, authentic and valued by the communities who use them. Moving to Slide 12. Placemaking is in Lendlease's DNA. It has also been the key driver of our origination success. Our placemaking discipline supports our planning consents, enhances our presales and prelet commitments and underpins the value proposition that attracts investors. Our investment in digital delivery capabilities and our broader suite of Podium digital products will enable us to enhance our customer experience and support even more meaningful place creation. Turning to Slide 13. One differentiator from other industry players is our end-to-end capability across all aspects of real estate from concept and planning to design and delivery, through to funding and investment management. We believe this is critical in order to generate superior economic, social and environmental outcomes. The competitive edge generated by this integration is realized in many ways: knowledge and ability across the whole value chain to maximize returns, access to third-party capital to fund development and improve returns, origination capability, execution excellence through delivery and the best people that are attracted to the best projects. We are committed to better leveraging this competitive edge and are well positioned to generate significant growth from our strategic focus areas of large-scale mixed-use urbanization projects and the Investments platform. Both will receive a larger share of the group's organizational resources and capital over coming years. We will also redirect resources away from areas where our competitive edge isn't as strong or where the industry structure has either deteriorated or changed. For example, last week, we reached agreement to divest our U.S. telco business. We have previously also identified our intention to further downweight our position in the Retirement Living business. And we'll resume the sale process for Services when market conditions improve, in addition to pursuing other capital-recycling opportunities. 2 residential businesses that remain core to the group are our military housing business in the U.S. and the Communities business in Australia. They both have strong market shares with favorable industry structures. The military housing business has been a great success story for Lendlease, with its innovative funding structure making it a "very high return on capital" business. We believe there are redevelopment opportunities on several of the housing estates over the coming year or 2 that, if converted, will provide significant development management fees. In addition, there is also growth potential in the event other armed services open up their lodging programs for privatization. While the Australian Communities business has experienced a difficult couple of years, it has generated strong returns over a long period of time and enjoys a strong market position. Turning now to Slide 14. We are on the cusp of a substantial uplift in development activity. The growth in the secured pipeline, along with the achievement of planning milestones and detailed analysis of both market absorption and investment partner appetite, gives us the confidence to target more than $8 billion of completions per annum. That is an increase of more than 80% on our historical completion rate of $4.3 billion per annum. While we cannot predict the duration of COVID-19 impacts, we already have work in progress with an end value of greater than $8 billion. The lag between origination of a project and planning approval is often up to 3 years. With more than 60% of the $113 billion development pipeline secured within the last 3 years, until recently, planning has been a constraint on the acceleration in production. More recently, significant planning progress has been made on projects that have been secured within this 3-year window. We now have approval on the south precinct of Milano Santa Giulia, the Milan Innovation District, 30 Van Ness and stage 1 of Silvertown Quays. And we intend lodging today for planning approval the phase 1 scheme for the San Francisco Bay Area project. These are all large and long-dated projects that will play an important part in the acceleration of production. The 12 gateway cities we have exposure to have strong underlying real estate fundamentals and deep capital markets. Once they navigate the current COVID-19-induced recession, we believe the market absorption potential is significant. In the appendices, we've included a slide on each of these 12 gateway cities that provides detail on just how much potential these markets have. I'll come back to investment partner appetite. Turning to Slide 15. We have been investing heavily in recent years to build a global capability to execute. Without this investment, we would not have had the origination success that we have had. We would not have had the continual improvement in our placemaking expertise, nor would we have had the successful planning outcomes that have been achieved. We also have confidence that our global operating model will facilitate execution at scale. The model provides a framework for consistency in approach and the adoption of best practice while empowering our project directors and teams to lead and innovate. They are then supplemented by a range of systems that provide a strong governance and support framework from safety and sustainability to finance and human resources. This global and local infrastructure does come at a substantial cost, but it is more than worth the investment given the value it brings to the group, and the capital-efficient business model permits us to make this investment. In periods where there is a significant shock to the market such as now with COVID-19, it may appear we have too much operating leverage, but we have been through an extraordinary period and believe we will be very well placed when we come out the other side. We are also investing with the longer term in mind by creating digital capabilities that support our strategic objectives. We believe there is significant cost reduction potential from the digitization of both Development and Construction; as well as benefits in terms of customers' experience, safety and sustainability. And our scale projects make us an attractive partner for leading technology businesses, and our landowner partners increasingly see this as a critical differentiator. In some cases like San Francisco, we are able to partner with technology leaders in driving innovations such as modular off-site construction and digitization for their own projects. A lot of the cost of our digital investment is absorbed at a project level as we drive production efficiency. There is little doubt that disruption is accelerating in our sector. Our reputation in this space means we are well placed to stay ahead of this curve, as evidenced by the industry leaders collaborating on our upcoming Autonomous Building Summit, including Google, Salesforce, MIT, Singtel, alongside our government partners. Turning to Slide 16. Our current Investments platform provides a strong foundation for our ambition to move to the next level and turn it into a scaled platform globally. We have 5 decades of experience in managing real estate assets with trusted fiduciary and governance structures. Our expertise spans multiple sectors in both listed and unlisted markets. In addition to the high-quality and sustainable product created from the urbanization platform, we have significant experience and expertise to add value at the asset level. While we have achieved strong growth, we believe there is much more to come. Moving to Slide 17. The group has deep relationships with approximately 150 investment partners. Our top 20 investors account for 2/3 of the equity across the platform and include some of the world's largest real estate investors. The chart illustrates the top 100 global investors that control approximately $1.4 trillion in real estate. A few observations. We have relationships with more than half of the top 100, although not all of those are on the platform. That is a significant opportunity. Our relationships are heavily weighted towards the Asia Pacific, Middle East and Canada. A lot of scope remains to attract U.S. and European investors. These relationships take a long time to build. And we intend to deepen our relationships with existing investors, convert other relationships into platform investments and form new partnerships. The recent partnership with PSP Investments on the Milano Santa Giulia project is one example. We've been exploring opportunities with PSP Investments for an extended period but have only brought them onto the platform recently. We expect long-term capital flows to remain strong, with allocations into real estate from the approximate USD 20 trillion of funds controlled by the world's largest investors likely to rise. Turning to Slide 18. We are confident that we have the capabilities and resources to create a scaled global investments platform. In addition to monetizing the secured development pipeline that will increasingly produce investment-grade product across our international gateway cities, we intend to launch new products that are underpinned by our competitive edge. We are also confident that external market opportunities will arise, and we'll investigate and pursue some of these alongside our investment partners. This includes leveraging the likely impact of COVID-19 market-related dislocation. This is a key priority for the group. Moving to Slide 19. Our construction capability has played an important role in the delivery of our urbanization projects. We have a rich heritage with project management, design and construction excellence across a range of sectors, with leading risk, safety and sustainability credentials. The target earnings contribution to the group has been progressively reduced over the last decade to its current weighting of 10% to 20%. The expected strong growth in Development and Investments is likely to result in Construction earnings moving towards the lower end of that range over time. There are 3 areas of strategic focus: first, the design and delivery capability for the internal development pipeline. Within that, the model is likely to be more flexible going forward with the increased use of third-party general contractors in selective international gateway cities. Second, a focus on sector expertise, strong market positions and client relationships. This will involve a backlog position that is diversified by client, sector, geography and contract type. Third, embedding digital capability across the delivery platform to drive productivity. Turning to Slide 20. Lendlease has always had a strong social ethos when it comes to delivering sustainable places and practices. For more than 60 years, we have built our reputation as a global company that creates value by doing what matters and being bold in our thinking. We have a history of leadership in sustainability, from developing Australia's first 5- and 6-star Green Star-rated buildings to creating large solar-powered communities and carbon-neutral buildings and places. This has been driven by our commitment to looking over the horizon and charting a long-term course for the future. Looking forward, we are committed to creating places that are resilient and adaptable to change, are inclusive, use resources sustainably and foster environmental and community health and well-being. We recently announced 2 bold sustainability targets. Firstly, we have committed to being a 1.5 degree aligned company. For Lendlease, this translates into a commitment to net 0 carbon emissions by 2025; and to absolute 0, meaning 0 carbon emissions across Lendlease products, including the supply chain we use, by 2040. Secondly, we are committing to the creation of $250 million of measured social value by 2025. These targets are intentionally ambitious. The environmental target sets a global benchmark for our sector. We are making a conscious decision to be a leader in driving industry transformation to limit global warming and to create lasting social value. This is not only the right thing to do but also will continue to provide a strong competitive advantage given the rapid increase in institutional and client demand for sustainable assets. I will now hand over to Tarun.

Thank you, Steve. And good morning, everyone. To enhance the strategic direction and priorities that Steve has outlined, we have refined our financial strategy and the portfolio management framework. The overall objective of the financial strategy is to prioritize capital allocation to our focus areas of urbanization and Investments so that we can improve our quality of earnings while maintaining strong underlying returns with lower volatility. There are 3 focus areas: firstly, our focus on accelerating development activity to greater than $8 billion per annum to harvest the immense potential of our secured development pipeline. We aim to work our development capital harder going forward by increasing operating leverage through larger programmatic investment partnerships with our blue chip investors. We have developed proven, flexible funding models to deliver our pipeline. These provide the opportunity to maximize risk-adjusted returns while providing attractive options for investors to access our pipeline. Our capital-efficient land management models provide the flexibility to accelerate or decelerate production as market conditions dictate while protecting downside risks. Secondly, our focus on driving strong growth of the Investments platform. We will increase our capital allocation to Investments to above 50%. This will involve launching new products and increasing our co-investment stakes. And thirdly, we will improve the quality of our earnings. We are targeting the underlying earnings mix from Investments to rise by approximately 10 percentage points to 40%. We are shifting to operating profit as the key earnings metric to better match earnings with underlying cash flows. And we will redirect more than $1 billion of capital towards our focus areas of urbanization and Investments. Moving now to Slide 23. The significant growth of the development pipeline, including the diversity by gateway city and product type, provides the scope for a material acceleration in development activity. In terms of measuring and reporting on that activity, there are 2 key changes going forward: first, aggregating communities and urbanization; and second, shifting from volume-based targets to one value-based target. We believe it is more meaningful and transparent for us to target and report on a total value-based metric. It will also highlight the benefit of operating leverage and the funds under management being created to drive future investment earnings. Over the last 5 years, we have completed $4.3 billion of development per annum. Our new target is to produce greater than $8 billion of product per annum. While this will not be achievable in FY '21, there is already more than $8 billion of work in progress, and over the next 18 months, we are confident that significantly more will be added. Also bear in mind that the nature of our business model means that profit may be potentially booked on conversion into delivery rather than completion of development activity. To recap on the old targets. Communities had a target of 3,000 to 4,000 lots per annum. Residential apartments were 1,000 to 2,000 per annum. And commercial, we had a target of 2 to 3 buildings commencements per annum. The market will still be able to monitor our progress on these product lines through our disclosures, but as production accelerates, the residential apartments and commercial building launches are likely to increase above these previous targets. We will continue to target 3,000 to 4,000 lots per annum from our Communities business, including continuing our strict capital allocation to that business which operates mostly on the capital-efficient land management model. We expect our capital to work a lot harder for us going forward. The average invested capital in our Development segment has been circa $4 billion to produce the $4.3 billion of annual completions over the last 5 years. Going forward, we expect $5 billion to $6 billion of capital to be sufficient to produce our target of more than $8 billion of completions per annum. That is a significant improvement in operating leverage, with the multiple of production to invested capital anticipated to rise from the historical average of 1.1x to greater than 1.4x. Our investment partners will play a critical role in funding our development pipeline through larger programmatic partnerships, and I'll cover that in more detail later in the presentation. Turning to Slide 24. We have prioritized land management models in recent years to provide more flexibility and lower risk from market volatility like we are facing today. Importantly, $1.7 billion of invested capital in land and infrastructure controls a $113 billion development pipeline. This is a unique feature of our Development business. More than 90% of our development pipeline has been secured on capital-efficient terms, with more than 70% under land management agreements and a further 20% on staged payment terms. With staged payments, we typically align the land payment with our expected conversion timing. As a result, projects secured on this basis often perform in a similar way to land management. Barangaroo South is a good example of a staged payment model project. The land management model was first conceived in our Australian Communities business, where arrangements were made with owners to pay for the land as we drew down areas for subdivision. We then transitioned and refined this model and have now exported it to our global urbanization platform. The key features and benefits of the land management model include flexibility in delivery to respond to market conditions. For example, if market conditions are not favorable, we wait until they improve and are not compelled to commence uneconomic projects. Pricing and payment is at drawdown of land or completion of the building was staged. This removes the largest downside risk for a developer, which is sitting on unproductive land that either declines in value or results in accrual of capitalized interest. The impact of planning delays are mitigated by the deferral of land payments. Infrastructure contributions are staged and aligned to expected drawdown, again reducing our exposure at risk. There are also benefits for landowners. In exchange for the significant downside protection, we provide the opportunity to share the benefits of higher development revenues with the landowner, and the landowner shares in value capture from our placemaking. The land value in our precincts typically increase over their respective delivery periods, providing higher payments to the landowner. This model also provides us with significant master plan flexibility. We only draw down the land stage by stage; and we can pause, stop or accelerate future land drawdowns, depending on market conditions. In partnership with our landowners, we have been able to increase the yield and remix between sectors as market conditions change, such as converting residential for sale to commercial or residential for rent as market conditions dictate. This is a flexible business model which mitigates significant risks and is capital efficient. Moving to Slide 25. We are confident that organic capital generation over the coming 5 years will be sufficient to fund the group's business plan that is based on the strategy we are sharing today. I'm sure you will come up with your own estimates, but an indicative capital base can be derived from assuming we generate returns at the midpoint of the target range, distribute 50% of operating profit and gearing rises to the midpoint of our target range. Please note the indicative slide is based on Development and Investments segment capital. Using those assumptions, the capital base increases from $8.5 billion today to approximately $12 billion 5 years from now. Based on our new strategic targets, that would provide $5 billion to $6 billion of invested capital for Development and $6 billion to $7 billion of capital for Investments. That implies an additional $3 billion of capital for the Investments segment. Our intention is to increase our co-investment positions from the current level of circa 5% and to support new fund growth as a proportion of funds under management. In line with our strategy to direct resources to our focus areas, we expect to recycle more than $1 billion of capital. Steve has already noted the sale of our U.S. telco business. While the deal does not close for another 60 days and therefore we are not at -- not yet at liberty to discuss commercial terms, it was sold at book value. We have also identified a further sell-down of our exposure to the retirement business. The sale of the Services business will be resumed when market conditions improve, and we will also look for other opportunities to redirect capital to our focus areas. Turning to Slide 23 -- 26. We will be evolving our approach with investors via the greater use of programmatic and partnership models. This will increase the velocity of development production, provide greater certainty of future capital and funds under management and reduce friction costs. For large-scale investors, they will gain more certain access to our product pipeline. Our recent deal at Milano Santa Giulia with PSP is a good example. We have sold the initial 2 buildings into the partnership and the established framework and documentation will be used for future buildings, significantly increasing velocity and certainty of execution. The programmatic approach will be used more frequently on our secured pipeline, while the partnership approach will be more likely on new origination. Moving to Slide 27. We receive a lot of feedback from market participants requesting more insight into our funding models. To illustrate the mechanics of a typical funding model, we have used an asset-level example that is applicable for the single-asset and programmatic funding approaches outlined on the previous slide. In this example, we assume the retention of a 25% stake by Lendlease during the development phase, followed by further sell-down at completion. An investment partner agrees to purchase 75% of the building on practical completion for a pre-agreed consideration. We receive profit at the time of sell-down, including the revaluation of our retained stake. During the development phase, we receive development management fees and investment management fees. In terms of cash flow, the investment partner typically pays us for their share of the capital spent to date and then funds their share of the project capital during delivery. Final payments are made on practical completion. Additional development profit is typically recognized on completion, including the release of development management fees, contingencies and any upside from leasing [ of ] presales. Upon transfer to the Investments segment, we receive a performance fee, if applicable, and generate ongoing investment management fees. Our 25% interest or stake is sold-down to a long-term hold position. In programmatic investment partnerships, we repeat this funding model on future buildings, thus building scale, funds under management and annuity earnings over the life of the project. We have chosen the delivery of Barangaroo South towers 2 and 3 as a case study to further illustrate the model. Barangaroo was a staged land payment model. It was secured in 2009 to regenerate a large mixed-use precinct. We received consent (sic) [ concept ] plan approval in 2010. We received tenant precommitments of circa 70% across the 2 towers before construction began on the circa $2 billion Lendlease International Towers Sydney Trust or LLITST, which was created to fund the towers in 2012. Investment partners were 75%, and Lendlease had a 25% co-investment. Profit streams through the life cycle of the project were we made an upfront sell-down profit. This reflects the value created prior to commencement for securing planning, prelets and fixed-price construction contracts. We earned development management fees, and we earned a performance fee on practical completion. This was structured in the form of a split cap rate that rewarded our team for additional leasing. Funds under management fees were also earned for managing LLITST. Our investment partners received attractive returns, value from additional leasing, above-market rents through placemaking and cap rate compression on completion of the towers. So 10 years after securing the project, which is now, all development profit has converted to cash. Our co-investment is 3.9%, which is circa $150 million, and this is a long-term co-investment position that supports funds under management of $4.8 billion. It's now time to move into dryer although essential elements of the financial strategy that we have changed to support our strategic agenda. Turning to Slide 28. Going forward, operating profit will become our primary earnings metric. This will be calculated by adjusting statutory profit for revaluations in the Investments segment. I encourage you to refer to the appendix pack for a more detailed explanation, including a reconciliation for the last 5 years. It is the right time to make this change given the shift in our strategic priorities. We believe it is a key component in our transition to improved earnings quality. It is more predictable. It supports underlying cash flow conversion, and it is more comparable with key real estate players. We are also of the view that it better aligns the interests of our securityholders with that of management. It will provide more clarity in management decision-making by driving a greater focus on underlying fundamentals. It is more controllable and transparent, and employee incentives will be more closely aligned with value creation. To provide context for the implication of adopting operating profits on our portfolio management frameworks, we have restated earnings over the last 5 years to highlight the impact of the change. EBITDA would have been approximately $100 million per annum lower. The Investments segment contribution to the EBITDA mix would have been 5 percentage points lower too at 31%, and the Investments ROIC would have been reduced by 2.5 percentage points to 7.7%. There would have been no effect on either the Development ROIC or Construction EBITDA margin. In terms of the group, the impact would have been to lower the ROE by 1.4 percentage points to 9%. Moving to Slide 29. The portfolio management frameworks provides the structure for our financial strategy. The key changes to the PMF are highlighted on the slide and shaded in darker blue. While seemingly modest changes on face value, they are significant. The 2 key changes that are not shaded but rather called out are the Investments segment capital allocation that is targeted to shift from the lower to the upper end of the target range; and the Investments contribution to the EBITDA mix, which needs to rise by approximately 10% to reach the midpoint of our target range. I'll now cover off each of the elements of the PMF on the following slides. Turning to Slide 30, capital allocation. One of our key strategic priorities is to build a global scale investments platform. We intend to participate alongside our investment partners in the growth of the platform. Consequently, it will involve a higher capital allocation to Investments; and the current lower half of the target range to the upper half of the target range, that is Investments moving from lower to the upper half. We expect this to occur despite the planned acceleration in development activity. In terms of capital allocation on a geographical basis, the 5 percentage point lift to the target ranges for each of the regions reflects the higher capital weighting as we convert the development pipeline. While 3/4 of the development pipeline consists of projects in gateway cities outside of Australia, the accelerated conversion of the development pipeline will be funded in conjunction with our investment partners. In addition, Europe, which accounts for more than 40% of the pipeline, has 2 longer-dated projects, Euston Station and Thamesmead Waterfront, that remain several years away from commencement. These 2 projects account for 23% of the total pipeline. Moving to Slide 31. The move to operating profit has a material impact on the EBITDA mix. For the Investments segment to reach the midpoint of its target range, Investments will need to contribute almost 10 percentage points more towards operating EBITDA. This will be driven by a combination of the higher capital allocation to Investments and the growth in the Investments platform that is expected to provide a substantial increase in both fund and asset management fees over time. As we participate alongside investment partners, our co-investment positions are expected to rise from the current 5% of funds under management. We have already highlighted our intention to launch new core, core-plus and value-add products across several sectors. In addition, we intend to pursue external market opportunities alongside our investment partners as we see attractive opportunities likely to emerge from current market volatility. Moving to Slide 32. I'd like to reinforce that our new targets are derived from hurdle rates that have not been adjusted. The change in target -- return targets relates entirely to the adoption of operating profit and the re-weighting to the Investments segment. The shift lower in the Investments ROIC is a function of the removal of revaluations from the Investments segment that has a 2 percentage point impact on estimated returns. That takes the new ROIC target to a post-tax return on invested capital of 6% to 9%. Again I emphasize that the underlying return hurdles and assumed income streams have not been amended. These changes then flow through to the ROE target. The change in target ROE has not been influenced by a decline in the cost of equity over recent years. Stepping through the reconciliation of change in group ROE target range -- target to a range of 8% to 11%, starting with the previous target of 10% to 14%: The impact of the shift to operating profit has an approximate 1% impact. The re-weighting to Investments segment has a further impact of approximately 1% to 2%. Turning to Slide 33. Our capital structure objectives remain unchanged. They are to operate with an investment-grade credit rating, maintain a sufficient liquidity buffer to manage through the cycle and minimize our weighted average cost of capital. Having considered those objectives, our target gearing range remains unchanged at 10% to 20%. The capital structure will be reassessed over the medium term as the group re-weights towards Investments, which will be credit positive in our view. Looking at distribution policy. The distribution policy changes from 40% to 60% payout from statutory profit to 40% to 60% payout from operating profit. We believe this change more closely aligns to underlying cash flows of our business. We estimate the change, based on the midpoint of our targeted ROICs and invested capital base, will provide an approximate $200 million to reinvest into growth over the coming 5 years. That wraps up the changes we are making to the portfolio management framework. And I'll hand over to Steve.

Thanks, Tarun. And turning to Slide 34 and reemphasizing the highlights. Over the next 10 years, we will focus more on what we do well by expanding and upweighting those parts of the group that have the greatest potential to drive securityholder value. Our competitive edge in placemaking is backed up by our proven track record of delivering urbanization projects across targeted gateway cities that generate superior economic, social and environmental outcomes. And our end-to-end capability across all aspects of real estate sets us apart. It has enabled us to secure our current $113 billion global development pipeline, as our customers and partners trust our ability to deliver long-lasting value. It is also what will underpin the next decade. We can be selective on what we seek to add to the pipeline. We believe our mixed use capability will emerge in an even stronger position following the varying impacts that COVID-19-driven changes in human behavior will have. We are focused on the areas of the highest return in our Development and Investments portfolios, and we'll be prioritizing our capital and people resources towards these areas. We have developed pathways to accelerate the delivery of our development pipeline. We have confidence that the planning milestones we have already achieved, along with detailed analysis of both market absorption and investment partner appetite, will enable us to target more than $8 billion of completions per annum. The more than $50 billion of investment-grade product that we expect to create from the development pipeline provides a significant opportunity to materially boost our Investments platform. It also provides a strong base for future annuity earnings. We also have the appetite and global capability to pursue the launch of new products and market growth opportunities alongside investment partners and are already engaged in these discussions. The combination of these initiatives provide a strong pathway to sustained earnings growth as well as higher earnings quality. Our pipeline and the strength of our platform means we're in a strong position to drive long-term, sustainable securityholder returns through a very focused strategy. Thank you. We will now open up for questions, recognize we haven't left a lot of time, but we do have investor meeting in the next couple of years -- couple of weeks. And the webcast, I might remind you, is not two-way, so we'll only be able to take questions over the phone. Thank you.

[Operator Instructions] The first question comes from Ben Brayshaw from JPMorgan.

Just a couple of questions. Firstly, around the new fund initiatives, essentially broadening the strategy from core into core plus and value add, would you be able to touch on just some thoughts or current intentions around the rollout of new vehicles and in particular in Australia where, the [ greatest ] funds under management are for the business, the greater scale and possibly opportunity set is over the next 2 or 3 years, please?

Yes. So there are significant opportunities that we see emerging over the next couple of years, and as I flagged, we are already in advanced discussions with some of our investors around how they will support us in that strategy. There are 2 fairly apparent ones. And specifically to your question on Australia, in the value-add space, we see opportunities for conversion and repositioning of office assets, and we are in discussions with some partners around how we'd approach that. And I think one of the things that we see as a strength for us is our strength in sustainability; and adding economic and social -- economic, environmental and social value to the assets that we acquire. And that has got a lot of interest from investors. In the retail space, I've flagged that we've already identified in our existing funds that there will be some conversion opportunities to mixed use, and we will look outside of our funds platform for those opportunities as well. And then the other area to call out is build to rent. So we've flagged or reminded investors of how significantly our growth in that space has accelerated overseas already. We were cautious around the tax hurdles that made return targets less attractive in Australia for developers in that space. We do see some shifts in that emerging over the short term, and we are very active in identifying opportunities for us to grow our build-to-rent position in Australia as well. So they're the immediate opportunities that we're focused on.

And Steve, just on build to rent in Australia. Can -- existing schemes at Melbourne Quarter or showgrounds or the Perth project, could they be adapted to incorporate build to rent?

They can. And I think, where we have been cautious before, typically, as you know, we target development returns in the 15% to 20% kind of level. And the financial metrics really on build to rent in Australia were showing sub-10% development returns to meet the type of returns that investors would want from that sector. A couple of things happening: One, investor return targets are obviously coming down a little bit as we continue to go through what's expected to be a longer-term low interest rate and "low cost of capital" environment. And secondly, there is movement on things like land taxes which will alleviate the tax burden to some extent, and that pushes the development returns up. So yes, we have looked at projects like Melbourne Quarter and RNA. We do believe that there is capacity for conversion of some product. And in the design aspects of those products, we're already focused on how we might tweak the design aspects to maximize their value as rental products where it makes sense. We haven't called out any specifically that -- but we will come to the market and clarify where we head there.

And just finally on build to rent. Apartment markets do seem reasonably soft at the moment in terms of occupier demand. And the potential for a supplier to hang, to persist into the future is, I think, reasonably commonly expected. In terms of willingness of capital to deploy in residential for rent, how do you reconcile those softer short-term market conditions with enthusiasm from third-party investors to invest alongside and activate some of these projects?

Yes. So I think that there's a couple of things to call out. One, given lack of supply -- or the shortage of supply, I should say, or insufficient supply, across most of the gateway cities we operate in, there is a need for more product. And there is obviously more of a push towards making that more affordable, and driving the institutional base in build to rent will assist that. That's why a lot of both government and private operators are focused on that. We've grown our investment base in build to rent significantly in recent times, and we have significant investor appetite to continue to grow that. In fact, we've ramped that up in recent months even during COVID, as you've seen. On the sales side, our view is, firstly, this is a very long-dated pipeline and strategy ahead of us; and we are absolutely confident that cyclical factors will play out. As we come through the pandemic, there will no doubt be a resurge of demand for high-quality product over time. And actually, even during the pandemic, you will note that we flagged that we've increased our presales on One Sydney Harbour to over 80%. So there is still demand for high-quality products, and we expect that to pick up post pandemic. And Tarun, did you want to add anything to that?

Yes -- no. I think the only thing I'd add is globally we're seeing build to rent as a preferred sector for some of the underlying reasons that Steve said. It's I think investors are -- especially the larger investors, are taking a long-term view of build to rent. They want to get set. There is not a lot of product in, say, London pipeline. It's an emerging sector. Australia, it's an emerging sector. And we do see our capital partners and investment partners wanting to get set at scale, and scale is important. So even today, they have appetite so they can start to build that scale because a couple of buildings can be $500 million each. And they need much more than that, so there is deep appetite, in our view.

And just finally, around stage 1. Would you be able to perhaps just describe, if you like, how you see MSG, MIND, Van Ness and Silvertown? I suppose Van Ness speaks for itself, but what does stage 1 look like for those 3 projects that you're calling out? And as well, if you could touch on, please, Lendlease ownership position. At what point do you expect third-party capital to be introduced into those schemes? So in other words, any thoughts or guidance on the funding model?

Yes, Ben, I'll take that. So I think the ones we've called out and the ones you're mentioning -- I might touch on MSG because I spoke to the programmatic model there. Stage 1, we've already got MSG south planning approval, which is the first 2 office buildings, but there are other office buildings that are approved as part of planning. And we're now in the market looking for further precommits. As they come through, we will -- in that particular example with PSP, we are 50-50, so as the new buildings come, we will sell them down in a 50-50 structure into that partnership. And then we will move to the north side of MSG, which has got the mixed-use residential, retail and other build-to-rent products. So what we plan to do is -- the end value of MSG, circa $4 billion plus, over time, you'll see that convert to funds under management and recurring annuity streams that come out of it in our partnership. So that's the approach there. It's not dissimilar on the others that we're calling out. That's what we plan to do. So on IQL, which is International Quarter, we have planning for the first building but master plan approval for the next 4 or 5 office buildings to come. And again, we would be looking to partner with 1 or 2 capital partners across the precinct so that we can get that repeatability and velocity of production going through. The same thing applies on MIND. We've got planning approval. We've got tenant demand coming through from life sciences, innovation and technology sectors. And again, we are in the market talking to capital partners on a more programmatic deal. So that's what, Ben, we're drawing out on the larger secured projects. We want to do partnership arrangements where the fees and the documentation is done. We have alignment of interests. And then as buildings complete, we get the opportunity for performance fees if we outperform the targets in the partnership. In terms of our capital allocation, it'll depend on -- project by project, but typically it'll range in that sort of -- at a starting point in that 25% to 50% range. And then we sell-down either during production or at stabilization of each lot.

And sorry. Just on Silvertown, do you have any feedback there around when you might be looking to commence construction?

Silvertown has got stage 1 planning approval, which is about 1,000 residential lots. We are working with the authorities there now on infrastructure. And also we are looking to see, based on again the demand in that part of the market, whether we can add more affordable product to, again, provide that product to the market. And timing-wise, Ben, we are currently talking to authorities, talking to capital partners, doing the design and finalizing the stage 1 master plan timing. It'll depend when we cross those Ts and dot those Is.

I might just jump in there on Silvertown too just to reemphasize Tarun's observation there on the remixing capacity. So in response to where we are in the cycle, we are pulling -- there was always going to be a very significant component of build to rent and a significant component of affordable housing as well, and we are pulling forward those 2 components as we wait for the build-to-sell market to recover. And that's something that we're quite dynamic about and we're able to do. We know there's significant demand for the build-to-rent component of that project, so that will be our first priority, and that's what we have approval to proceed on. And on San Francisco Bay Area on phase 1, what does that mean? We are lodging planning for the first phase, which is actually an additional component above what we originally called out. There are an additional 2,000-plus homes that will be delivered under that phase, and that's obviously a significant upside on the project compared to where we first started. That has become a prioritized component of the project for Google, so we've accelerated the work on that first phase. And we're -- we intend to lodge planning in the U.S. today.

The next question comes from James Druce from CLSA.

Yes. Just really simple question, to start. Can you just provide a bit more color on how fast you can ramp up to $8 billion; and just how you sort of got to that number, one that's a higher number? Why not a lower number and sort of the big constraint short term?

Yes, I'll just touch on the time line, and then Tarun can maybe go back to some of what we've already covered on the capital structure and how we drive that improved operating leverage. On the time line, obviously we've -- as we've spent a bit of time discussing, one of the key components is getting through planning approval, which typically takes 2 to 3 years from securing the projects. So we've been a little bit cautious on calling out the scale-up of activity previously until we had much better visibility on where we're headed on planning. We obviously also spend a lot of time building up resourcing capability and putting ourselves in a position to deliver on those projects, so have made very good progress there. Clearly, COVID has had an impact. So that slowed us down a little bit and we flagged that, but we already have over $8 billion currently in work in progress. What we're calling out here is, when we use the term production, we're talking about completed product. And so that's why we're saying it will be over the shorter term to medium term. We can't be particularly definitive because we've got to wait and see how long the pandemic impact plays out, but our -- we are very much already underway with over $8 billion of work in progress. And the target is $8 billion in completions per annum. And Tarun, do you want to just explain how [ we'll get to that ]?

Yes. It's how we get to it is really the aggregate estimated end value of what we see in the pipe. And why $8 billion? We think $8 billion -- and we've said we can achieve more than $8 billion, but again when we look out the next 5 years, we look out the production time lines and the planning and the things Steve has mentioned on -- mentioned, we can see clear pathways for us to be able to produce that level of production. And I should point out that excludes any new origination we do. That is based entirely on our existing secured pipeline, but clearly over next 5 years, we are likely to originate other projects which is not currently included in that.

Okay. And should we think about any distinction between how you partner build to sell and build to own? Obviously they're still within the urbanization projects, but for the build-to-sell stuff, will you typically be allocating more of your own capital?

Yes. I think what we are saying is just, as a general proposition, we are looking for greater operating leverage out of the capital employed in development to get the flywheels but also increase velocity of capital. You're right. In build to rent sector, it's much more conducive to more upfront forward sales-side structures or along those line, like we've done in our U.K. pipeline with CPPIB and a hybrid structure we've got with First State Super or Aware Super as they're called now, but you have seen us even in Barangaroo, for example, which is a build-to-sell product. We have brought in a JV partner, which is Mitsubishi Estate; and in that instance, again to point out the capital efficiency that we get and the derisking we get through the PLLACes transaction. So you've got to take that as part of the operating model as well. And as we, I think, highlighted at the results, James, we do see PLLACes playing a role in our forward build-to-sell pipeline. So it'll be a combination of some JV partners. PLLACes is how we'll make sure our capital continues to work hard.

Okay. And maybe 2 more questions for you, Tarun, just on the capital structure. I mean you've got a bit of conviction in the development pipeline. I'm assuming you'll be earning a pretty good spread above your cost of capital. And given sort of the market or investor appetite for growth stocks, did you think about lowering the payout ratio further?

Yes. So with the payout ratio, as you would have noted, because we'll be paying out from operating earnings, that clearly will be a lower payout based on historical stat basis, assuming in the future there are revaluations coming through our Investments portfolio. So that is lower. In terms of the 40% to 60% of operating earnings, we believe that, that is the right balance of rewarding the various parts of our securityholder register in terms of providing income distribution, particularly to our retail investors, but also having retained earnings within -- enough retained earnings to fuel our growth. Again I'd point out the range is 40% to 60%. So the Board retains flexibility clearly to operate within that range, and we will make recommendations based on the business outlook going forward within that range.

Okay. And just in terms of some of your divestments. So you're downweighting with time, and I just wanted to get a feel for where you want to get that to. And also you sort of expressed the view that military housing and Australian Communities are still very much a core part of the business. Can you just go through the competitive edge you have in those businesses as well, please?

Yes. So on retirement, I think we've said to the market before that we were actually in advanced discussions on selling-down another component of retirement pre the pandemic. So we -- obviously, that slowed us down a little bit, but our ambition is to end up at about a 25% stake. So our expectation is that we would sell another 50% of that business over time or over, hopefully, the shorter term. And we are recommencing those discussions already around the next phase of that sell-down, and the structure that we established when we sold our first 25% provides a pretty flexible structure to enable that to be done. In relation to Communities and military housing: On military housing, as we said, it's a fantastic business in terms of the high returns that it drives and its annuity-based earnings effectively at this point in time. There is also opportunity to drive earnings in both the short term and the medium term; the short term, from a couple of projects where we already have approval to increase the capital spend on redeveloping some of those projects. So that should drive higher development earnings in the shorter term. And we also have the other components of the armed services looking at military lodging, which may or may not eventuate over the next couple of years. If it does, that provides some further upside to the business. If it doesn't, it remains a very high-performing annuity-based earnings stream. The other question, on Communities. The Communities business has obviously been through a tough period last couple of years. We've seen us have our competitors a significant uplift in appetite in recent months off the back of government stimulus. So we do expect that business to pick up. We still target our 3,000 to 4,000 lots per annum. In terms of its performance over a long period of time, it's been a good performer in terms of return on capital. We don't have a massive amount of capital invested in that business because of the land management nature of a lot of what we have in our backlog. So we see that as an attractive business. We are a strong player in the market, so we see that as a core part of our residential offering. We also see opportunities. As the COVID impact continues to play out, there is obviously further distribution of demand likely to emerge as well. So it's core to our placemaking capabilities and it's part of that business.

The next question comes from Tom Bodor from UBS.

I'd just like to sort of talk through, on these programmatic partnerships, how the partnerships would impact the development returns to yourself. And particularly presuming that your percentage returns probably increase but your dollar profit decreases as you do bring partners in, is that sort of how you're thinking about it?

Yes, Tom, it's a couple of things to note here. Firstly, as we've called out, we have 21 projects secured, where we've secured them on balance sheet [ and our ] land management model predominantly. And we've been adding value to that -- those secured positions through getting planning, design and buildings and getting tenants. So when we sell-down into those partnerships those buildings and lots, there is clearly a cost of capital difference between what we secured those projects at and what the cost of capital of our long-term investors is. So at that point is a value creation point, and that's where we book the profits on sell-down. And that would be a feature that would remain going forward. So that's the first point. In terms of the second point that you're raising, sharing more, yes, there will be clearly more sharing, but that's how we increase the velocity of capital and the speed at which the pipeline is delivered. But to -- again, if we outperform the lower cost of capital that our investment partners have, we have the opportunity. And we're starting to put in performance fees, where we can share with them on the upside created through the development process. So we believe that programmatic approach will provide us good earnings capacity and good ability to generate attractive ROICs going forward despite the underlying cost of capital and those things coming down because of market conditions, where you're still holding a 10% to 13% ROIC in development for those reasons.

Okay. And then if I just sort of move to the international towers case study where you talk about towers 2 and 3. I think, as a template, it's a good example, but I'd just be interested to understand what your ideal long-term hold is. If you're trying to increase weighting to Investments, but in this example you've sold-down to a 3.9% stake, would that be different going forward? And what is your idea of long-term hold once an asset is stabilized?

Yes. Tom, as I mentioned in my speech, currently we've got about 5% co-invested capital as a percentage of FUM. We are flagging that, that will rise. And the way to think about it is across our core platforms, which is LLITST is now a core product -- it's fully -- it's highly leased and stable. Our investment partners typically like -- are happy with us to have that sort of co-investment to align our interests with theirs. So in co-funds, you would see us around that sort of 5% -- 3% or 4%, 5%, 6% in that -- in the order of, but we have flagged that there'll be more development programmatic partnerships and focus also increasing on core-plus and value-add products. In those products, typically our investment partners would like higher sponsor capital allocations. So we will be making those, but clearly in those products the returns are higher as well, so commensurately we think we'll find the right balance. And you will see us increase that co-invested capital from 5%. It will go up, but you're not talking -- it will go up. It will be somewhere in that 5% to 10% range as an average, but that's how you should think about it in core, value-add development partnerships, higher capital allocation from Lendlease, co-product lower.

Okay. And then maybe just a final one. Appreciate there's sort of a lot of moving parts with the sort of structural piece for office but just be very interested in where your current leasing negotiations are up to sort of around the world on various office projects. And have you -- do you expect to be able to get big precommits in the next 12 months?

Yes. So our -- I mean obviously we're talking here about a strategy over a 10-year period. So we are calling out that we think the office sector, whilst it's undergoing some disruption at the moment, will still be an attractive component of our business. The -- when you look at some of the projects that we have continued progressing on in the commercial side, in Milan we made good progress on signing up tenants in Milan in the early part of the year. We still have some positive discussions around a number of tenants across technology and other sectors for the MIND project. So they continue to progress quite well. Our biggest component of office going forward is actually Euston in London, which is a fantastic location, but it's several years before we will get access to that site as the infrastructure development progresses. So in our view, the market in the longer term for office will remain very attractive. As we've called out, yes, there will be some dislocation over the shorter term. There's obviously an increase in vacancies in most markets around the world today, offset to a large degree, though, by a low cost of capital, which is probably going to hold up asset values better than it otherwise would have, but as we emerge from the pandemic, we think there'll be some behavioral shifts and there will be some reduced appetite. We know people like BP have come out and said they're going to sell their London headquarters. But we have a diversified base of projects as well. And a number of our projects are actually offering the opportunity for some hub-and-spoke style models. Elephant -- sorry. Stratford is obviously a location that plays to that; MIND, MSG, projects like that. So we think we've got a very flexible pipeline that we can tailor to meet the leasing demand as it emerges.

The next question comes from Stuart McLean from Macquarie.

I think you might have just been touching on it a little bit there at the previous questions, but just on Slide 23, just looking to understand. The historical production rate was 1.1x invested capital. You're now going to 1.4x, but there's no change in the ROIC. I would have potentially thought that -- if production rate is kind of doubling and you're getting this greater operating leverage, that it starts to show through in the ROICs or in earnings, but with the static ROICs, it doesn't seem to be. Can you just talk to that, please?

Yes. Stuart, our ROIC target, as you know, is 10% to 13% range. Last 5 years, we've delivered 10.5% in the Development business, where -- so -- and if you look at the headline project-level returns, it's still indicating that ROIC target translates to project-level ranges from 17% to 20%-plus development returns, which on global standards are still very attractive development returns. And that's the returns at which we've secured the pipeline. I think you would note that the underlying growth profile, rental growth and income growth, is -- and the costs of capital and all that has actually come down. And COVID has increased that, but we haven't actually dropped it or dropped our ROIC targets. In fact, we're holding them. And you would see the 10% to 13% is the range. So if we really move forward in this pipeline, then you would anticipate, if we've successfully delivered the strategy, that we start to move maybe to the upper end of that range. But it is quite a significant 10% to 13% range, and they're attractive targets by any comparable developer out in the market.

Okay, understand. And then on the AUD 50 billion FUM opportunity, how much of that realistically would you -- do you think you'd be able to keep within the platform? Would you be targeting 75% of that, 80%, 100% of that number?

Yes, Stuart, last 5 years, we've called that out as well. I think, in the past, we've converted about 80% of the institutional-grade properties we have developed. I would say that our appetite is to retain even more than that, but last 5 years was 80%. So we would like to retain almost everything. It's only at points in an individual building sell-down where someone just gives us such a great offer that we take it, but given now we're looking to do more programmatic deals which are longer-term deals with our investment partners, it's really at the front end we'll strike the deal. And then the remaining buildings, everything else being equal, should really start converting to FUM over the long term. So I would say we want to target, as I said, to keep as much of that we can in our pipeline and for our investment partners.

Okay. And on maybe those programmatic examples that you've been talking to, are you able to give an indication of the proportion of profits that come upfront or in the development phase versus what happens at maybe final sell-down or completion? Is it roughly a 50-50 split of earnings between origination and at completion? Or can you just give a bit of a breakdown there?

Yes, Stuart, that's getting into quite specific examples. It really depends whether it's build to rent or it's office; and sector by sector, how much resi it has, how much mixed-use component. So I think it will depend really deal by deal, I think, is the best way to give you the answer. I don't think there's a hard and fast rule, but if you look at what we've done, I can only point to, say, the CPPIB deals in Elephant Park or in our London pipeline and the PSP pipeline. The initial buildings in PSP, for example, are 80%, 85% let. So we are booking almost most of the profit upfront because it's substantially let, whereas in, say, resi for rent, if they are not let, there is still a stabilization period, so there is still rental stabilization provisions in those [ CAAs ]. And if we outperform, we get more. So it really depends how much prelet and preleasing is done building by building that will dictate how much we're booking upfront and how much is coming at the latter part of the development. I think that's how you got to think about it, Stuart. It's what's the prelet assumption and presales.

The next question comes from Sholto Maconochie from Jefferies.

A lot have been asked. I'll just touch on the hub and spoke. Obviously, you've mentioned the European projects. You've got Waterbank over in Perth, but nothing has really been done there for a while for the commercial and resi component. Does the attractive grants on offer in WA for resi make that attractive to launch that project over there, [ absent migration ]? Or what's your thought on build to rent and build to sell with Waterbank and the office component there?

Yes. So on Waterbank, it's obviously taken a lot longer than we originally intended to bring that to market. And that was due to a combination of factors, including the government was surcharging the land. It took a lot longer to get through that than they had originally planned. We are looking at a mix of build-to-rent and -sell opportunity there at Waterbank. We are not going to create short-term expectations on bringing that to market in the next 12 to 18 months, but we are working through getting approvals to launch the first phase of that project. So it's certainly something that now on -- with government subsidies does lend itself to reconsider a build-to-rent component of that product, which wasn't originally in the scheme.

Okay. And then on the dividend policy, obviously a lower absolute level given the stripping out of the fair value gains. If you look at that slide in the appendix, Slide 3, it's -- including FY '20, it's sort of retaining at the midpoint of that target sort of $300 million a year. And that would flow into your returning to the fund your shares at asset sales. So you're quite confident, with that retained earnings and the asset sales you flagged, that [ you're clearly in that ] midpoint of your target gearing in the next sort of 5 years?

Yes, Sholto, again a lot depends on what actually happens, but on a pro forma basis given our targets, those -- that's the maths that we put on that slide. Again, the Page 3 in the appendix is the historical revaluations that came through. Obviously we had -- it's about average of about $100 million a year. It will really depend what the revaluations are, as we go forward over the next 5 years, how much investments we have and what the growth of reval upside is there, but yes, to answer your question: Based on the illustrative model we've done, that's the amount of funding we have to deliver on the pipeline and to pivot to investments and to fund the development pipeline with the programmatic models. So it all adds up in -- on that basis.

On that, I guess the -- if you look at obviously [ rising targets over ] during the cap rate compression cycle, is the development -- the fair value uplifts go to NTA or through development profit when you sell-down. Do you think that will see a sort of -- is that one of the reasons to move more to that operating profit level, because of the noise that those fair value gains create? And you'll probably only be getting them on completions rather than the like-for-like [ you've had as benefit over ] the last sort of 5 years.

Yes, on the development side, Sholto, really, firstly, it will go through development profit. We have -- I mentioned that. And really it's the reward. We don't -- cap rate is the extra cream you get on it, but typically the sell-down profit reflects us -- if we bought the project well, which we have historically. And the planning certainty, GMP will lock-in with the building business; and the prelets we do and the presales. It's really the reward for that effort is what's booked through and it's not typically cap rate. Cap rate firming comes through at the back end when the development is finished and we then sell-down our interest back to the capital partners, but the upfront sell-down, where appropriate, not all the time, but -- because we derisk our projects, especially the ones we've secured on balance sheet, we get rewarded for that derisking. If it's a partnership model, like we had on Paya Lebar Quarter where we originated the project with ADIA together, pari passu at the project level, then you don't get the upfront development profit. It all comes at the back end. But programmatic deals, there will be an opportunity to sell-down and make earnings because of those derisking and also a different cost of capital of what our development partners, investment partners will have to what we originated the deal on. That's the value-add of our business model.

And then just finally, Slide 28, the sort of target mix. If you look at -- obviously you'll sell Engineering. It close soon; Services, hopefully, 12 months. You've got about 50% Development, 31 Investments on Slide 28, so say 80%. That would sort of see you in line with like a EPRA-style NAREIT index. Are you targeting any indices? Because it seems a bit more [ reg-like ] on the -- that operating profit metric. Is that a target for the team and the Board and management?

Yes, Sholto, we don't do our strategy to get into indices. So it's not -- that's not what -- the strategy we've come up with is what we think will add long-term value to securityholders. In terms of the earnings mix and where it goes through as the strategy is delivered, there is an opportunity because of the outcomes in terms of higher annuity earnings and also the mix of development earnings that we may be able to get into some of the indices like, you mentioned, NAREIT index. But again that would be an outcome of the delivery of our strategy over the next few years.

The next question comes from Sameer Chopra from Bank of America.

Just had 2 questions. So one is just on the target of $8 billion. How should we think about the step-up? Is that a FY '22 development revenue line, or is that an FY '25? I'm just trying to figure out how quickly can you scope any step-up from sort of $4 billion to $8 billion. That's kind of question one. And the second one is, alongside that, what's the mix of in-house versus outsourced construction that sort of drives that $8 billion number?

So in relation to your first question, it's certainly not an FY '25 target. It's a much shorter-term target than that. As we've flagged, we have already over $8 billion in production. So what we're calling out is the actual completed numbers, which is why we can't be definitive, obviously, as to when that'll land because we are still in an unusual environment today. But certainly we have enough in production and enough planning approval to achieve those numbers with some confidence and well ahead of the back end of our strategy definitely. So the -- in terms of construction: So at the moment, the mix of internal versus external is lower than where we'd like it to be. It's around about 25%. And we expect, as we build out our pipeline -- obviously it's a very considerable pipeline. We expect that to drive towards the 50% level. We were at just below 50% a few years back. We expect to climb back up to that level. The other thing that we have said is that in some of our international markets we don't have an aspiration to do the delivery ourselves. We will engage third-party general contractors where that makes more sense over time.

Steve, can I just ask one other question just at this point around the capital partners? With -- you mentioned that there's significant interest from capital partners. There's about 100 or so that you're working with. How have they reacted to the last few months? Has there been a pullback in their interest levels? I'm surprised there hasn't been. I would have expected, just with the amount of redemptions in the market, that the capital partners would have stepped back. "Let's pause. Let's think about things and then maybe return in a while." Your thoughts?

Yes. So firstly, Sameer, I'll just note that we're overtime, so we might have to make this the last question, I think. The -- but in answer to that question: Obviously, there has been people pausing in different ways around the world in terms of transactional activity, and you've seen that in the broader markets. What we've been able to do, as we've called out in our presentation, is we've still managed to progress the relationships with CPP and Aware and launch new buildings within those partnerships during that period. And we've also secured a partnership with PSP during that period, which -- and also with Mitsubishi Estate on One Sydney Harbour. So when we say that we're still progressing, obviously there's evidence that, despite the concerns in the market, there are still deals that we're able to get done. And that just reflects, I think, the quality of the pipeline that we have and the appetite our investors have. As a general observation, what I would say is that we do talk to our business and our team on a very frequent basis, to our investor base. And we do customer surveys on a regular basis. We get updates from all of them. And a lot of them have been doing what we've been doing, frankly, having a relook at their strategy over the longer term, trying to anticipate how they might need to adjust their investment strategy in real assets to reflect the behavioral changes that may emerge. And we're in the -- I guess, a privileged position to be having those open dialogues with them. So we're pretty clear on where we think they'll emerge. And yes, there has been a pause and a bit of a rethink from a number of investors, but some of the more sophisticated players have quite a bit of liquidity now, and so we do expect strong appetite for the right product. So I'm sorry we have to cut things off, but we've gone overtime. So as I said, we are on a road show and I think we're attending a couple of conferences as well in the next 2 weeks, so we will have considerable opportunity to provide a bit more color to the strategy discussion. Thank you for your time. And I want to thank my team also for a tremendous amount of hard work in this. This is all backed up by some very significant analysis on the opportunities ahead of us. And we're very focused as a collective management team and Board on delivering the strategy that we've outlined today. Thank you very much.