Lendlease Group (LLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lendlease 2022 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Lombardo, Global Chief Executive Officer. Please go ahead.

Good morning, and thanks for joining the Lendlease 2022 half year results presentation. I'm Tony Lombardo, Global 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 I extend my respects to their elders past, present and emerging. Joining me today is Simon Dixon, Group Chief Financial Officer. This is Simon's first results presentations with Lendlease after commencing in his position in October last year. Today, I will provide an overview of Lendlease's results for the half year ended 31 December, 2021. Simon will then talk through the financial results. I'll provide an update on our operations and outlook. We will then take questions. Turning now to the half year snapshot on Slide 4. As announced at the group strategy update, FY '22 is a reset year. The implementation of our new operating model which will be fundamental for future success is progressing well. This has translated into improved operational performance, exemplified by our Australian Communities business, where establishing a dedicated leadership team has resulted in renewed focus and a sense of belonging for our valued employees. There is now a clear pathway back to improve profitability for this business. We've made significant inroads in reducing the cost base and remain on track to meet the savings target of more than $160 million per annum. The review of the development portfolio is now complete. While the impairment has landed slightly above our previous expectations, we've made progress on extracting capital from the underperforming projects. More importantly, we are confident in the quality of the development pipeline and its embedded value. We've enhanced market disclosures to provide greater transparency. In the Investment segment the composition of management earnings has been disclosed with funds management separated from asset management. In development, both pipeline and capital are identified by our 3 operational phases. In addition, the earnings of the community's business is now reported separately. We continue to deal with the ongoing impacts of COVID. Asset Management performance and investment income continued to be disrupted although the impact on earnings and operations has lessened. Across the group's urban pipeline, we've experienced weaker demand for new apartment product, especially from investors. Population declines across many gateway cities are impacting underlying real estate demand, with international border closures preventing both temporary and permanent migration. Recent signs of improvement on these fronts are encouraging. For Construction, origination and delivery has continued to be disrupted reflected in both declining revenue and new work secured. We've made headway in progressing projects and new initiatives we expect will drive future profits. We have established approximately 6 billion of new investment partnerships that are expected to contribute to the acceleration in development activity and grow our funds under management. This included the launch of a value add diversified fund, a joint venture to develop the remaining office precinct at International Quarter London, and the acquisition of an industrial portfolio. Development completions were at in historical low and combined with few commencement suppressed financial performance. However, we expect earnings to recover in the second half. There was more than 5 billion increase in the pipeline that is master planned or in work in progress, including plan milestones across a range of projects, some of which are expected to commence in the second half of FY '22. The Construction segment displayed resilience despite ongoing productivity impacts from site shutdowns and restrictions. Financial performance was within target range. Public sector projects have been an important buffer for the Australian region and now compromise more than 3/4 of our backlog. Healthcare is a key sector with the business recently appointed preferred bidder on 2 large hospital projects, one which converted late last week. Moving to our financial and operating performance in Slide 5. The group recorded core operating profit after tax of $28 million for the period ending 31 December, 2021. Core operating earnings per security was $0.041 with the return on equity of 0.8%. The distribution per security of $0.05 represents the payout of the earnings of the trust. The statutory loss after tax of $264 million included a loss of $262 million from non-operating items and a loss of $30 million from the non-core segment. The group's operating metrics reflected the subdued market environment. Funds management grew 11% to $42 billion, assets under management remained stable at $29 billion and the group's investment portfolio increased to $3.8 billion. Work in progress the lead indicator of full completions was $16.1 billion. There were $0.2 billion of completions relating entirely to community projects and the development pipeline declined marginally to $112 billion. In Construction, new work secured was well down on the prior corresponding period at $2.4 billion on the back of lower origination in both Australia and Americas regions. Backlog revenue remained solid at $11 billion. I'll now hand over to Simon.

Thanks, Tony. And Good morning, everyone. Turning now to our financial performance on Slide 7. Core segment EBITDA of $264 million, decreased 44% on the comparative period as challenging operating conditions continue to impact the business, in particular the Development segment. The Investment segment delivered EBITDA of $141 million, up from $121 million. Management EBITDA from funds and asset management was $59 million, down from $71 million with earnings lower across both components. Funds Management revenue was flat with higher base fees offset by lower performance and other fees. Expenses were higher as we invest for growth. In asset management, residential earnings were steady with a small loss in retail and office where higher costs were incurred following one-off benefits recorded in the comparative period. This outweighed a recovery in retail asset management fees as the impact of COVID receded. Investment portfolio EBITDA from our directly held investments was $82 million, up from $50 million reflecting a recovery in underlying investment income and an improved operating performance from the Retirement Living business. This equates to an annualized investment yield of approximately 4.5% across the portfolio, up from under 3% in the comparative period. Development EBITDA was $39 million, reflecting few completions and the absence of development related investment partner initiatives. We expect this to be the low point for profitability, which is set to recover from the second half of FY '22. Origination fees following financial close on the North East Link PPP was the largest contributor along with the valuation uplift at Sydney Place following the achievement of further leasing and construction delivery milestones. The building is approximately 60% pre-let to Salesforce and JLL Australia and is on schedule to complete in early FY '23. The Communities business accounted for all of the $0.2 billion of completions in the period. Settlements of 504 lots were insufficient to cover overheads in the half, with the business recording a loss of $6 million. We remain on track for a significant improvement in the second half, which is expected to account for approximately 3/4 of FY '22 Settlements. The Construction segment delivered EBITDA of $84 million, down from $104 million, reflecting both lower revenue which was down 6% and a 40 basis point decline in the EBITDA margin to 2.6%. A 28% decline in the Americas, where COVID continued to impact the volume of new work secured and delay the commencement of projects drove weaker revenue. Productivity issues and fewer project completions contributed to the decline in margin. Despite this, the margin remains healthy at the midpoint of the target range. Several one-off benefits reduce reported costs in the prior corresponding period, resulting in higher corporate costs. Costs comprised group services, treasury and digital, which has been separately disclosed for the first time. Depreciation and amortization charges of $74 million, along with net finance costs of $68 million were both largely unchanged. The low pre-tax core operating profit in half, combined with a recognition of tax losses and a change in the tax rate in the U.K., resulted in a small tax benefit of $7 million. These items sum to the core operating profit after tax of $28 million or $0.041 per security. Non-operating items of $262 million within the core segment and the non-core segment loss of $30 million provided the reconciliation to the statutory loss of $264 million. Non-operating items include the restructuring charge and development impairment expense, which I'll cover on the following slide. And pre-tax revaluations in the Investments segment of $68 million. The after tax loss for the non-core segment was $30 million. There were several moving parts as we closed the sale of Services. The result includes 4 months contribution from the Services business and a small gain on sale that was more than offset by an impairment post-sale relating to the handing back of workspace and a provision for the retained energy and technology projects. There has been no change to provisions relating to engineering exposures. Turning to Slide 8, covering cost reduction and the outcome of the development portfolio review. The simplification of the group's operating model, in conjunction with the disposal of non-core businesses provides scope for a significant reduction in the cost base of the organization. We believe this will be achieved without compromising the service proposition to our customers or limiting the growth ambitions of the group. We remain on track to achieve targeted savings of greater than $160 million per annum. The required actions to achieve the full cost savings have been identified, approximately 60% implemented to-date. Most of the remaining initiatives are expected to be implemented by the end of financial year 2022. Headcount reduction of 260 fulltime equivalents and the handing back of approximately 24,000 square meters of workspace will generate approximately $100 million in annualized cost savings. We expect a further reduction in headcount of more than 100 fulltime equivalents by 30th June, along with other cost reduction measures. The benefits of the cost out will start to be realized in a meaningful way from the second half. As illustrated on this slide, the various measures put us on course, for a pro forma overhead cost base of approximately $640 million for FY '23, down from a normalized $800 million in FY '21. We have adjusted the FY '21 expense base for the temporary cost savings initiatives and wage growth following the onset of COVID. The anticipated range for restructuring charges to achieve these savings is $150 million to $170 million, having been narrowed from the initial estimate of $130 million to $170 million. A charge of $124 million was accounted for in the period with the remainder expected in the second half. The development portfolio review was completed confirming the preliminary findings shared at the strategy update last August. The review identified a small number of underperforming projects, while a change in development strategy will expedite the release of capital on these projects, an impairment expense of $299 million was incurred in the period. This compares to the initial estimate of $230 million to $290 million. The higher outcome relates to a resolution at our Waterbank project, where an in principle agreement with DevelopmentWA was reached. Moving to Slide 9, cash flow. Underlying operating cash outflow was $388 million, reflecting the challenging operating conditions in conjunction with reduced new business activity. Some timing differences, including working capital movements in Construction, are expected to correct in the second half. Operating cash flow relating to non-core was neutral. Underlying investing cash outflow was $373 million. Cash outflows included continued investment across key development projects in delivery and the equity contribution to the new Industrial Fund. Proceeds received from the sale of Services, was the predominant cash inflow. Turning to the group's financial position on Slide 10, invested capital of $8.4 billion is allocated $3.9 billion to investments, $5 billion to development with the remainder in corporate, construction and non-core. The $0.6 billion increase in the Development segment relates to the acceleration of expenditure ahead of higher completions. Key projects utilizing additional capital include Sydney Place, One Sydney Harbour, The Exchange TRX and Ardor Gardens. The movement also includes a $0.3 billion reduction related to the impairment of development projects. As foreshadowed by Tony at the FY '21 results, core business segment returns for the first half were below target, reflecting difficult operating conditions. Investments returns were marginally below the target range. Development returns were negligible, and the construction margin was in the middle of the range. Investment grade credit ratings continue to form an important component of our financial strategy. From a treasury management perspective, the balance sheet remains in a strong position with gearing of 12% the lower end of the 10% to 20% target range. We reassessed our liquidity needs and subsequently reduced some unutilized facilities which would generate savings from improved treasury management. Our available liquidity is down from just under $5 billion at FY '21 to $3 billion. We believe this still places the group in a strong liquidity position with $0.8 billion of cash and cash equivalents and $2.2 billion in available undrawn debt. The average debt maturity increased to 7.2 years from 4.9 years, providing greater flexibility and access to longer term capital. The group continued to diversify its sources of financing issuing its first U.K. green bond. This is the third green bond issued by the group with green, social and sustainability financing now accounting for 58% of total gross debt facilities. With that, I'll now hand back to Tony.

Thanks, Simon. The cornerstone of our strategy is to create values through utilizing our real estate capabilities across key global gateway cities. While they remained near term uncertainty, we believe the most desirable cities will continue to be the driving force of economic, social and cultural life. We have unique insights into the likely evolution of the urban landscape given our global reach and expertise. Highlighted on the slide are key metrics across our 3 operating segments and mapped our major urban projects and targeted gateway cities. Turning now to health and safety on Slide 13, as always, getting our people home safely each day remains our highest priority. Tragically, we had a fatality at one of our construction projects in New York. Our thoughts are with the worker's family, friends and colleagues and everyone impacted by this tragic event. More than a decade ago, we introduced Global Minimum Requirements or GMRs to provide a consistently high standard and operating discipline that defines the Lendlease way of managing health and safety. We transparently report safety data across all our operations where we have a presence, regardless of who has statutory responsibility. This includes incidents and fatalities to non-Lendlease employees and visitors. We recently refreshed our GMRs, this is the fourth addition which addresses updated work practices, incorporate lessons learned, and applies a specific focus on the health and well-being of our people. The application of our GMRs has been reflected in the improved safety performance across the past decade. Safety is lived 24/7 at Lendlease, and we are always looking for the next improvement. We'll continue to strive as an organization to eliminate incident and injury everywhere we operate. Demonstrating leadership and sustainability is a key strategic priority for the business, and we've continued to progress our agenda during the year. The group launched a new partnership with Stora Enso, one of the world's leading suppliers of sustainable timber. The partnership focuses on R&D into sustainable products, including cross-laminated timber, new ways to use these products in construction and their accessibility in the global market. Our Mission Zero roadmaps are now live in every region, and they set out specific strategies and time frames to eliminate scope 1, 2 and 3 emissions with a target to be absolute 0 emissions by 2040. Respect for people drives the way we work. Over the past 2 years, we've laid foundations for a globally consistent approach towards understanding and mitigating modern slavery risks across our operations. The sustainability credentials of our projects and portfolios continue to be acknowledged by industry bodies. In 2021, Global Real Estate Sustainability Benchmark, our Barangaroo Office Fund was the #1 ranked office fund globally out of 1,520 funds, and we had 4 funds ranked in the top 10. Overall, our Lendlease fund has achieved the World's Most Sustainable Office Fund for 7 of the last 8 years. Turning now to our core operating segments beginning with Investments on Slide 15. Achieving the scale in Investments platform is a strategic priority. We are targeting funds under management of greater than $70 billion by FY '26, with growth coming from development pipeline and an expanded product offering. Funds management EBITDA for the period was $40 million, down from $48 million. We are investing in the platform, and that was reflected in the higher expenses as we resource up. This will support the $6 billion of initiatives achieved in the period, including the launch of new products such as the Real Estate Partners 4, which introduced 2 new investors to the platform. We are conscious not to invest too far ahead of the curve. The 11% growth in funds under management to $42 billion was underpinned by capital expenditure across investment products that are in delivery along with new mandates and products. These include a new office mandate with Keppel REIT at North Sydney, and industrial partnership with Morgan Stanley Real Estate Investing and a joint venture with CPP at the International Quarter London. There is approximately $3.6 billion of potential funds under management based on the development projects currently in delivery. This forms part of the $11 billion of new investment partnership secured since the beginning of FY '21. The group's urban development pipeline includes nearly $60 billion of investment products across commercial and residential for rent assets, and this is expected to provide an underlying base for both FUM and AUM growth. Asset management EBITDA was $19 million, down from $23 million, higher expenses as they normalized, more than offset a recovery in the retail asset management fees, which continued to be impacted by COVID. Turning now to our investment portfolio on Slide 16. The group's strategy is to significantly grow its investment portfolio. This will include retaining a large proportion of completed assets from the development pipeline and investing alongside partners through the launch of new products such as those noted earlier. Returns across the portfolio are recovering from COVID induced weakness with further normalization expected going forward. Investment portfolio EBITDA was $82 million, up from $50 million. Our recovery in investment income across our co-investments included the reinstatement of distributions across some of the funds. The improved trading performance of the Retirement Living business reflects the strength of the established housing market. There was a solid rise in resales, coupled with price growth, while new unit sales were steady. The group's investment portfolio closed the year at $3.8 billion, up with the uplift underpinned by the industrial portfolio acquisition outlined earlier. The investment portfolio was well diversified and includes $1 billion in retirement, $0.9 billion in each of office and retail assets and $0.7 billion in residential with the remainder in industrial. Redeployment opportunities are continually being assessed. Moving to Slide 17. Post balance date, our financial partner acquired a 28% investment stake in the asset management income stream of our Military Housing portfolio for approximately $170 million. The acquisition highlights the embedded value we have across the platform and our ability to crystallize this value. The investment stake has been acquired on an estimated FY '23 NPAT multiple of approximately 26x and will contribute circa $110 million to operating profit in the second half of FY '22. Following expected completion in -- following the expected completion in April, the group retains a 72% of the asset management income stream and the full ownership of property management, development management and construction management, as well as a $209 million equity investment in the portfolio. We've included the key portfolio characteristics on the slide for those that are less familiar with the business. Focusing now on the development segment on Slide 18. While it was subdued period for profitability and activity, we are confident we have now passed the low point for both indicators. EBITDA for the urban portfolio was $45 million with North East Link and Sydney Place key contributors, given there were no commercial or apartment completions. The Communities business made a small loss with flow settlements in the period. However, sales almost doubled on the prior corresponding period, and the business is now in a much stronger position. As I noted earlier, we believe the business has turned the corner. We have 12 active projects with an additional 4 projects achieving sales and settlements in FY '22. This includes the first release at Figtree Hill that is expected to commence selling this week. The sales momentum across our projects puts the business on track to hit its settlement target of 3,000 to 4,000 lots in FY '23, well above the expectation of approximately 2,000 lots in the current financial year. The current $16.1 billion work in progress, which is at the highest level in at least 5 years supports an upward trajectory in completions. Based on the current WIP, $2 billion of completions are expected in the second half of FY '22, climbing to $5 billion in FY '23, rising it further to $7 billion in FY '24. We expect this to improve, particularly for FY '24 as it does not currently include Communities WIP, as this product normally settles within a shorter time cycle. Turning to the outlook on development, Slide 19. The medium to long-term outlook for achieving our greater than $8 billion of annual completions is underpinned by our $16.1 billion in development WIP, with further growth anticipated from extensive development pipeline of $112 billion. While we continue to originate with a focus on Australia and Asia, more emphasis is being placed in progressing projects through the operational phases of development. Almost half the pipeline of $52 billion is in conversion. That is, it has been secured but is yet to receive master planning. And as a result, is not in the potential pool for commencement. Given the predominant use of land management model, just $0.4 billion of our capital is invested in this phase. We now have $44 billion of the pipeline and $1.9 billion of associated capital master planned. 60 Guest Street in Boston and San Jose, one of the 4 districts of our San Francisco Bay Area project were the major projects that progressed into this phase. The $16.1 billion in work in progress consumes most of our capital, accounting for $2.7 billion. We remain confident in a pathway to achieving more than $8 billion of completions from FY '24. Commencements will be the key to completing an equivalent amount of work. We expect to commence more than $5.5 billion in FY '22, having started $1.5 billion in the first half of 2022. Projects that we are targeting to start in the second half of FY '22 include the following: apartments for rent at 1 Java Street in New York, Life Sciences at 60 Guest in Boston, the third apartment tower at One Sydney Harbor and a data center in Greater Tokyo. In FY '23, we are targeting development commencements of more than $8 billion. The diversity in the range of product type and gateway cities of the secured pipeline, which will be supplemented by additional projects, highlights the breadth and depth of the development platform. Moving now to Slide 20, the Construction business has been a consistent performer for the group. During the period, the business continued to withstand COVID disruptions, delivering a relatively solid EBITDA and EBITDA margin. Our teams have worked diligently to achieve this result, navigating government-enforced lockdowns, site shutdowns and isolation requirements. New work secured of $2.4 billion was down significantly from $4.6 billion. The Americas was significantly below historical averages, reflecting subdued activity in key markets, along with delays in projects being brought to market. The $1.6 billion in new work secured in Australia included social infrastructure projects such as the Powerhouse Museum Parramatta and the Liverpool Health and Academic Precinct. Backlog revenue remained solid at $10.9 billion, although down from $11.3 billion at the end of FY '21 with revenue exceeding new work secured. We have an effective $6.6 billion workbook in Australia and good market share in targeted sectors in Americas, with $3.2 billion in backlog. The business is preferred for $3.7 billion in new projects, including several social infrastructure projects in Australia and the Americas. In addition, the Australian business was named the preferred bidder for the Frankston Hospital in Victoria and awarded the Women's and Children's Hospital in Adelaide last week. Our construction capabilities are integral to providing certainty and flexibility on the delivery of our integrated projects. Moving now to the outlook on Slide 22, the group entered the new calendar year with a renewed sense of optimism. The first phase of the 5-year roadmap for delivering sustainable performance, which involves resetting the platform for delivery and growth is progressing well. Our teams have embraced the new operating model and the greater ownership and accountability it provides. This will also generate significant efficiency benefits with the group on track to achieve the savings target of greater than $160 million per annum. While the operating environment remains challenging as reflected in the first half, we expect profitability to significantly improve from this half. The cost savings will start to be realized. The Investment segment is expected to recover further. Development commencements and completions are set to recover and construction productivity is expected to improve as COVID restrictions ease. In terms of return expectations for our operating segments in FY '22, we expect investment ROIC of 7.5% to 8.5%, development ROIC of 2% to 4% and construction EBITDA margin of 2% to 3%. The group is well positioned to achieve improved returns over the medium term as the operating conditions recover with the return on equity target range expected to be met by FY '24. Before I open up for questions, I'd like to conclude by thanking our people for their commitment and focus during what has been a challenging 2 years with the pandemic, and more recently, an unsettling period as we reset the business. Change can be difficult, and I acknowledge the impact on our people and thank them for their ongoing support. We'll now open up for questions.

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

My first question, just looking for you to clarify, Tony. The ROIC for the Development segment, the top end seems to have slipped from -- the target seems to slip from 5% to 4% this year. Is that simply just timing issues in relation to some projects or is that profitability issues in relation to some of the production?

We looked at the next sort of 6 months, Simon a couple of key things we looked at the Investments segment. As you can see we have now lifted Investments to 7.5% to 8.5%. And that's been supported on the back of the Military Housing transaction. On the Development, as we look at our completions and what's coming up, we've just tightened up that range. So we're going to come in that 2% to 4% range.

But the fact that you've timed it, is that a timing issue or a profitability issue?

Simon, Hi. It's more of a timing issue in the sense that, obviously, the calculation is based on average capital. So we've got more capital going into that segment, which will mildly adjust those returns. So certainly, if you're concerned whether it's sort of margin-related or timing related, I think the simple way to think about this is, its timing related. And again, it's still within the range, so the 2% to 5%, but just sort of tied into 2% to 4%.

And Tony, you brought up investment. So the $110 million of contribution to NPAT from the partial sell-down of the asset management side to Military Housing -- that will come above hill, go above the line and that forms part of the 7.5% to 8.5% ROIC, is that right?

Correct.

I'm just a little bit surprised that, that target didn't increase higher for the full year given the $110 million wasn't there when you first gave guidance.

Again, we gave a range of 5% to 8%. We've now refined that range to 7.5% to 8.5%. So we've uplifted to say we're going to be at the top end of that range.

Fair enough. And can you perhaps comment on -- I guess, give us some insight into, what needs to happen for that $2 billion -- sorry, the $4 billion of commencements that kicked off in the second half? Is it pretty much a given that they will kick off or are you waiting for some form of a leasing progress at Guest Street, et cetera? Can you perhaps just run us through what needs to be done before you kick them off?

Well, the Tower 3, we are always looking at its achieving a level of presales, so the team is working through those presales at the moment, so we're in the market selling. On Java Street in New York, again the teams is just working through its various requirements and planning and getting the site ready because we do have a capital partner already on that. On the Tokyo data center, again, we're just working through final construction contracts and letting those contracts, because we already have a pre-lease there, and we have the capital partner in place. Same with 60 Guest, we have the capital partner in place and the team is working through the final construction procurement process there. So they're really the key things that we need to do on those key projects.

Your next question comes from Ben Brayshaw from Barrenjoey.

Tony, I was wondering if you could give an update on the potential sell down of a further 25% stake in retirement business?

Yes, the retirement business is something we flagged that we're going to look to release capital. So it's something that we've had in our plans. So we are currently sort of working through that. So hopefully, over the coming 6 to 12 months we'll complete something on that side of the business.

And just in terms of the sale of the part stake in Military Housing, is it, I suppose, Lendlease's objective or do you retain optionality to increase that to, say, 50% at some point?

What we've done in a number of different SPV projects that we own and manage, we've managed to sell down a proportion of those. And the ones that we've sold down, we've sold them down to 50%. So there is a bit of flexibility in the future for us to look at if there's an ability to do more of that. Ultimately, we need to just look at the timing and need to look at the actual SPVs, but some of them have some different structures.

And just finally, the margin for the Funds Management business has been disclosed in the operational metrics. You mentioned that retail AUM had possibly contributed to some decline in management fees. Are you able to comment on whether that is like a temporary fee waiver or what's happened there?

Yes, I might just add some color -- I mean, ultimately, on some of the fee streams, what we have been doing is providing rebates to tenants and the like, and there was some $24 million of rebates that were provided during the period. So that has led to a bit of a lower income stream coming through. And on some of the asset management fees and the like, it depends on leasing activity and those sort of things for us to generate those other fee streams that we normally generate. So they've been at a bit more of a subdued level.

Your next question comes from Sholto Maconochie from Jefferies.

Just a couple of questions. Community seems to be sort of firing a bit better now, still strong demand with a big second half skew. I think we previously talked about that being looked at for a potential partner. Is that still the case? Or is it considered core again now? Can you sort of give us some update on that?

I think the key for us on Communities was to fix the business and really drive better performance. We've taken the necessary actions by restructuring the team and getting the team led by Matt Mears now under one central Communities team. As you can see, we had a 90% improvement in sales during the period, which bodes well to the future outlook, and we see a better stronger second half in performance. So really, from a management perspective, we're very much focused on getting it back to its returning ROICs going forward.

And then just on the liquidity, I appreciate your timing. You didn't have any -- outside of Communities, there's only really -- there's no contribution and you've got obviously some second half skew in development with starts and bring capital partners in. But our liquidity went down almost $2 billion, gearing up to 12%. Do you have enough liquidity to, say, get to you ramp up your pipeline do where it need to go? And would you introduce like a Place's style product again at Barangaroo off of new towers?

Look, I think on our liquidity, we've got more than sufficient liquidity, a total of $3 billion to facilitate what we need to do going forward. And we did take the opportunity to reduce some of the facilities during the period. We thought we had too much excess facilities, and that's why we've reduced that. Simon, did you want to add anything to that?

No, that's right. Obviously, I mean you can see that we did effectively cancel some debt facilities. You can see that on the treasury slide in the pack. That's the main contributor to the reduction in the committed liquidity position, obviously, also a reduction in cash. That $3 billion, we believe, is -- provides us with a very comfortable headroom at this stage. And if we look forward in terms of the capital that we'll need to deploy into particular developments and the Investments segment, that will be funded not only from net debt, which this is referencing, but also from retained earnings as we move forward, also realizing value from our balance sheet. The defense sell down is a good example of that. Another we've talked about, Retirement Living and Communities as well. And clearly, Place's transactions are still under consideration and is something which we can utilize for the early sort of release of capital or recycling of capital of projects. So taking all of those factors together, the $3 billion in committed liquidity is very comfortable.

You'll be saving on those line fees for that undrawn as well, I guess, come in second half going forward?

No. They were Australian -- mainly Australian dollar commitment, so where the line fees are higher.

And then just on the impairment, obviously, you've put the top end above the top end of the range of $230 million to $290 million, $299 million, and you sort of called out Showgrounds, Deptford, Waterbank. Did you write any back from Elephant Park? The leasing was pretty weak, but you've had really strong leasing since that opened up again. Is there any write-back on Elephant Park for the built to rent there?

Wasn't any write-back, so we had better leasing. So we've leased up to 360 units now of the 663, which has been positive. But there were no write-backs in any provisions there.

Your next question comes from Stuart McLean from Macquarie.

Just picking up on some of the conversations around the balance sheet. How much total capital do you think that Development business needs in order to hit the FY '24 targets? Is there an additional $0.5 billion-$1 billion from huge step to throw out some numbers around that, please?

Yes. Look, I think -- thanks for the question. If you look, I mean, at the moment, we have about $5 billion in capital in the Development segment. As we move forward to sort of increase the WIP up to the $20 billion where it needs to be to fund the ambition to hit the $8 billion in completions. I think the way to think about this would be an additional $1 billion to get there. So that will take us from $5 billion to $6 billion.

Can I ask a similar question on Investments as well? By the time we get to FY '24 can that increase as well or stand to be little bit constrained by the amount of capital going to development.

Look, it would need to increase and it will increase as we sort of deploy more capital into that segment to build up our sort of co-investment in FUM. This FUM increases with a target of $70 billion by 2026. So by 2024, there will be an increase, but the more substantial increase will really be taking that entire period between now and 2026. So if one was to look forward to 2026, then one would think that there'll be an additional roughly $2 billion needed to fund that ambition into 2026. So really taking the midpoint, you'd say it's up to another $1 billion between now and 2024 into the Investments segment if that was linear. So taking that together with Development is $2 billion. And again, if we look at our incremental net debt capacity and then in addition to that, retained earnings and the ability to realize value from our balance sheet, all of that, I think, gives us sufficient comfort that we can fund those ambitions.

And then also on the balance sheet. How much more is to go in regards to Melbourne Metro, place, in terms of the cash outflows across that project, including working capital, is there an updated pro forma number that you can provide?

Yes, I have that number. That number is unchanged from what's previously been provided to the market and sits at sort of $800 million.

Across all projects.

And all the engineering projects just...

$800 million. So that's -- again, that's unchanged...

But it's unchanged despite another 6 months of work at Melbourne Metro, I thought that number would have come down.

It sort of moves up and down, obviously, with working capital and other projects in the mix.

And just a final one for me. The corporate costs in one half, is that the annualized rate that we should expect, excluding the cost out? So I know the cost out will start to come through. But is that -- that number, what it would have been going forward on an annualized basis?

Yes. I think the way to think about that is that's a better representation of the baseline than the first half in the comparable comparative period pre-cost out. The benefit of the cost out will really come through -- start to come through in the second half through that line. And obviously, we've got the full benefit in '23.

Your next question comes from James Druce from CLSA.

Just wanted to get a sense, first of all, just the cash coming in for the second half. Obviously, your net debt has jumped a little bit this period.

So it sort of just drops out a little bit at the end, but I think the question was around the net debt during the second half or movements in the net debt?

Yes, just trying to get a sense of cash coming in for the second half. Is there anything particular to call out?

There's nothing in particular to call out. It's looking relatively neutral at this stage in terms of the inflows and outflows. So in terms of where we see net debt sort of sitting at the year-end. I wouldn't expect to see a substantial increase at this stage, but that's obviously subject to -- subject to market conditions and subject to unforeseen transactions. But at this stage, I would expect net debt to sit not sort of broadly in line with where it's sitting at the half.

That's clear. And then following on from Stuart's earlier question, just looking at the invested capital for the Investment and Development division for 2022, we talked about an increase of $1 billion to $1.5 billion this year. Is that still the case?

I missed that first part.

Yes, missed that first part. Can you just repeat the first part?

So to see the invested capital coming through from Developments and the Investments division, I think previously way you've talked about an incremental increase of $1 billion to $1.5 billion this year. I just wanted to confirm that's still the case.

Yes. For the full year we have $600 million in the first half in terms of the capital allocated to the Development segment. So that's broadly in line, yes.

And finally, your completion profile, you've got $2 billion for Developments. You have $2 billion in 2022, $5 billion in 2023, and $7 billion in 2024. Can you just talk broadly about some of the margin in those projects over those couple of years and what's already been realized?

I think we normally don't talk about the margin. But what we are saying when you look at the trajectory of the business, we will get back into our ROIC target ranges. So we are targeting to be achieving our FY '24 ROIC for the Development segment, which will get us back into that 10% to 13% range. Now in terms of the second part of the question, we have -- and I think we articulated this at the strategy. We had previously structured the deals differently, which meant there was an emergence of profits earlier. So for instance, the Barangaroo retail is about 50% of those profits have already been booked in prior years, and there's still about 50% of those profits to be booked in future years.

Your next question comes from Tom Bodor from UBS.

Simon, can I just ask what the major contributors to development ROIC are in the second half? Is it primarily Communities recovering or is there other sort of major transactions that you expect to come into that period?

Yes so that's correct. You will have Communities recovering based on completion. So we're saying we expect to complete about 2,000 settlements in the community space in the second half, you'll also expect that we've flagged $2 billion worth of completions in the second half. So there's a number of projects completing that will drop profits in the second half of FY '22.

And then following on that business, the Communities business will be achieving 3,000 lots in 2023. Is it fair to say that proportion of the development capital will be achieving the target ROICs for the Communities' capital?

So Tom, as you can see from this half, we sold 1,500 units. So we're building up that pipeline of work to be completed. And so, we do see settlements getting back into the 3,000 to 4,000 range. And we do expect that the business should be getting back to achieving its ROICs range.

Through 2023 for that part of the capital?

Yes.

And then just on the Construction side, late last year, you were saying about 80% of the costs in the backlog were sort of effectively locked in and spoken for from a procurement perspective. I'd just be interested in the 20% that hadn't been locked away, whether cost inflation is an issue and how you're managing that on the Construction business.

So on -- Tom, on our Construction workbook, there's probably at this point in time about 70% is that change with work that we've secured, so there's about $3.5 billion work to procure. What I would say a lot of that work is to do with trades and people, a lot of the costs that we've locked away really when we're doing projects. We've locked away a lot of the materials, concrete, facades and steel that we locked those away. So it really is more around people costs.

So is cost inflation building as an issue though for the margin on the Construction business or is it manageable?

I think from what we've got on board, we're managing that appropriately. And we've got a level of contingency and escalation already built into those projects that we're comfortable with. I think going on board and when we're looking at future projects, we're actually ensuring that we're pricing based on today's market conditions.

Okay. And just a final one on the Google project, you've achieved major planning on that project. When do you see the first profit contribution from that project?

At the moment, we're currently working with Google, our partner around the timing on respect to the full projects. So I won't put anything down in terms of when we expect that to occur. But at the moment, they're assessing a number of things. And then on the second front, we're working through what's the best way to fund it from a capital perspective going forward. So I'll update the market as we progress further on our Google projects getting through masterplan.

Your next question comes from Richard Jones from JPMorgan.

A couple of quick ones, sorry, Simon. Just in terms of the development invested capital, you're saying $6 billion as you kind of ramp up to $20 billion and with an $8 billion of completions. Is that a peak level or do you think it will be a sustained level of invested capital required for that division over the medium term?

Over the medium term, I think it's more of a sustained level rather than a peak level. Yes.

And just interested in your outlook on gearing over the next 12 months and perhaps with reference as to why a first half distribution was paid?

The first half distribution was paid out of the trust...

Which we must pay out of the trust so...

It needs to be paid. The gearing, we've got a very clearly stated gearing range sort of 10% to 20%. We're sitting at 12%. And obviously, expectations are that it will stay within that range.

[Operator Instructions] Your next question comes from Alex Prineas from Morningstar.

Just a quick one or 2 questions, is the distribution policy still to pay 40% to 60% of operating profit as a dividend?

It's correct.

And is that -- actually, I'll leave that one there. Just second question is around -- it's good to see the progress towards the $8 billion of development production targets for 2024. I'm assuming you can achieve that. Though, I was wondering, as far as I can see, there hasn't been any new projects added to the pipeline -- the development platform this half. Is that just a function of conditions in the market or is it a deliberate sort of focus on getting the existing pipeline into production? Or yes, can you talk through kind of what's causing nothing new to be added to the pipeline this half?

Yes so on the pipeline, a couple of things from a development perspective, we've been focusing on. So you would see the total pipeline is reduced to $112 billion. Now we did take into account the restructuring of our projects, so that reduced our portfolio downwards by some $5 billion. So that's the total pipeline. When you look at commencements for the period, our working production grew to $16.1 billion, so that was up by $1.6 billion, so that's quite pleasing as we are making progress on actively getting our work in progress book up, and we're sort of targeting to get that to a total of $20 billion. Our masterplan portfolio grew from $40 billion to $44 billion. So we've got now more than 5 years' worth of completions that are in the masterplan portfolio, which gives us the opportunity to commence those new masterplan projects. We've highlighted another $4 billion worth that we intend to start over the next 6 months, and we're targeting another $8 billion to commence in FY '23.

So that all relates to sort of existing work that you've sort of had in various stages of, I'll call it, design and have moved into either production or closer to production, but nothing sort of -- no kind of new projects added to the book in this half?

That's correct I mean the focus is all about conversion to masterplan and then getting those projects into commencements and production.

And is that -- would you be looking to add new projects given you're going to get -- you're confident that you're sort of going to approach that $8 billion of production eventually, presumably and you do need to kind of replenish the pipeline. Is that something that you can look to do further out or is it just a kind of lumpy kind of thing that some halves not much happens there and other halves new deals come on? Or, yes, can we expect status quo there for a while?

Yes, if you look at the work on hand, we've got enough work if we just mine the existing pipeline for another 10 to 12 years. So we've got enough of a pipeline. In terms of focus on new projects we've called out, Asia and Australia are probably the 2 markets we're looking to replenish and secure more work. So we're actively looking at a number of opportunities at the moment in those markets.

Yes. I think just to add to that, you'll note there was one opportunity secured in the first half in North Sydney at the Blue & William site, which has gone straight into production effectively. Straight into WIP.

Your next question comes from Amanda Richman from Australian Ethical Investment.

So I've just got a couple of questions more on sustainability issues. So my first is, does Lendlease independently assess the public interest of a proposed development, for example, by conducting its own assessment [ about ] risk or does one Lendlease rely on government to make these assessments about what is the best public interest use of the fact?

Thanks, Amanda, for that first question. What I would say is any project we undertake, we undertake a community assessment, a sustainability assessment to understand the opportunity and the risks around sustainability for that. Based on that assessment, we then look at what's the best way to develop the site. Now of course there's various stakeholders, both community, governments, partners and the like that we take into account in different markets. We'll need to go through various consultation project -- consultation periods of time before we could actually get the project up and running. So it is market dependent across all the markets that we operate, but we do that assessment as Lendlease.

And just with respect to the Mount Gilead site specifically. I know Lendlease has made various offers to build underpasses and establish koala corridors. Can Lendlease guarantee that koalas will have active and safe passage through the Mount Gilead site in perpetuity? And if it can't give that assurance, how has it justified going ahead with that development given the biodiversity sensitivity?

Yes, looking at the Mount Gilead site that you are talking about. Firstly, that's former grazing paddock. So I think people need to realize that it's being used for a long time as grazing paddock. So it was cleared farmland for a large portion of the site that we are working on. In terms of Lendlease's commitment, we're going to make sure that we have taken the measures to enhance the protection of koalas. That's why we've already committed and we will spend some $35 million on conservation plan as part of our new community project at Campbelltown. What we have done is the koala conservation plan meets the New South Wales chief scientist and engineers expert advice and is currently the only fully funded plan that will deliver the new protections and connections for designated koala corridors and increasing the quality and the quantity of habitat. So our plans ensure that we are fixing the underpasses at up and road, and we are increasing the habitats to create the right corridors for the future to help protect koalas.

And yes, I was aware of the various steps that Lendlease has taken and looking at what Lendlease is doing relative to the status quo. I guess my question, which I appreciate -- yes, it's partly grazing land. I guess my question was more just can Lendlease guarantee that the corridors will be actively used by koalas and that they will have safe passage through those corridors.

Look, what I could never do is guarantee. But what I can assure you is that we are making the right investments in the infrastructure for the future that we believe are the right steps that are necessary on this location to help protect koalas. That $35 million spend that we're going to make, we believe, will deliver that improved firstly, corridors and improved underpasses that will improve the overall habitat and hopefully protect our koalas. So we're doing everything possible that we can do through that investment. I can't guarantee that into the future. I can make sure that we as a team do the right thing by all flora and fauna when we approach every project we develop across the world.

Sorry, just to follow up, if you can't guarantee into the future, can you guarantee that the corridors that you established will be used while Lendlease has control of the site?

Yes, just when we talk guarantee, all I can do is make sure that we as a team commit to make the investment to create the corridors. Now while we have created that habitat, I'm hoping the koalas will use a habitat in the right way to traverse as necessary. So we know that, that wasn't the case today, and we are going to make sure we do that right -- make that right investment for that future koala population that we know lives there.

Just one further question from me. So given there is that residual risk that koalas may -- the corridors may not end up being suitable for koalas and koalas may not actively use it. How has Lendlease justified going ahead with the development given that continued residual risk to what is now endanger species?

Like everything we do across the group, we take into account the risks associated with all projects that we undertake. What we do is we work very closely with chief scientists and engineers to make sure we're creating the right solutions that we believe will enhance and improve habitats over time. So that's the way I can get my mind around being a responsible developer. That we're doing the right thing on this former grazing land that currently doesn't have those adequate corridors and that we will put into place. So I'm confident that we will do and take the right steps as we have articulated as part of our masterplan, which is on our website, and it's a 74-page document that covers the actions and what Lendlease is doing to the site.

There are no further questions at this time. I'll now hand back to Mr. Lombardo for closing remarks.

Again, I would just like to thank everyone for joining today's call. I just want to thank our investors and the analyst community. And hopefully, we can start to see the signs of optimism and recovery, and we are building up the momentum here at Lendlease. So again, thank you for joining today's call. Good morning and thank you.