Lendlease Group (LLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Lendlease 2022 Full Year Results Briefing. [Operator Instructions] I must advise you, this call is being recorded today, Monday, 22nd August 2022. I would now like to hand the call over to Mr. Tony Lombardo, Global Chief Executive Officer. Thank you, Tony. Please go ahead.

Good morning and thanks for joining the Lendlease 2022 Full 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 extend my respects to their elders past and present. Joining me today is Simon Dixon, group Chief Financial Officer. Today, I'll provide an overview of Lendlease's results for the year ended 30th June 2022. Simon will then talk through the financial results, and I'll provide an update on our operations and outlook. We'll then take questions. Turning now to the FY '22 snapshot on Slide 4. In August 2021, we announced our 5-year road map, Reset, Create, Thrive to enhance the way we operate to deliver sustained performance. The Reset phase enabled us to recalibrate the business in FY '22. We streamlined the company structure to provide a more simplified operating rhythm that allowed us to save $172 million in annual operating costs. Our refreshed management team allows for more nimble decision-making and increased accountability. Several portfolio divestments, as well as the exit of the noncore businesses strengthened the group's balance sheet. More than $1 billion of capital was recycled from the exit of the services business, the reduction of our investment in the retirement living business and the introduction of an equity partner into our military housing asset management fee stream. Our operating environment has been challenging. COVID continued to impact the organization while supply chain issues and market volatility were compounded by geopolitical uncertainty. Despite these headwinds, we made significant progress in resetting the organization. We've entered the FY '23 with a renewed sense of optimism reflected in momentum across the group. We're scaling up our investment management and asset management teams to grow our product offering, enhance the value of assets we manage and provide investors with stable and recurring income streams. Returns from the Investments segment outperformed our portfolio management framework target and the expected returns for FY '22. We established approximately $11 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 Comcentre Redevelopment in Singapore, a joint venture to develop the remaining office precinct in the International Quarter London and separate partnerships of Life Sciences in the U.S. and innovation districts in Asia. The development schemes across our $117 billion pipeline, leverage our capabilities in place making for communities we serve. Central City residential markets have begun to recover with residents looking for improved amenity and additional spaces to connect. While our workplace expertise is positioned to meet the changing employee expectations and employers' needs for talent retention, collaboration space and fostering corporate culture. Returns for the development segment were below our portfolio management framework target and at the lower end of expected returns for FY '22. This was due to low completions of $2.5 billion, stemming from lower historical commencements dating back to FY '19 and the impact of the change in approach on joint venture projects, which Simon will cover. Notwithstanding the subdued financial performance, we take significant momentum into FY '23. Notably, work in production is at a record $18.4 billion, following $4.4 billion of commencements in the second half of FY '22. In the Construction segment, our goal remains to be a market leader, maintaining the right capability to support operational excellence. We are being selective by targeting customers whose values align to ours. Construction returns were both in the lower range for our portfolio management framework and our FY '22 expectations. The segment displayed resilience despite ongoing productivity impacts from site shutdowns and restrictions, as well as supply chain constraints and related inflationary pressures. Backlog remains -- backlog revenue remains healthy at more than $10 billion with public sector projects, a key component of our go-forward workbook, as private sector activity has slowed down over the last few years on the back of COVID. Moving to our financial and operating performance on Slide 5. The group recorded core operating profit after tax of $276 million for the year ended 30th June 2022. Core operating earnings per security was $0.401, with a return on equity of 4%. The distributions of $0.16 a security, including a final distribution of $0.11 per security represents a payout ratio of 40% of core operating earnings. This is within our portfolio management framework target of 40% to 60%. The Board has taken the view that paying at the lower end of the range strikes the right balance between returns to security holders and the expected capital requirements for the group. The statutory loss after tax of $99 million included a loss of $333 million from non-operating items and a loss of $42 million from the noncore segment. The group's key operating metrics are shown on the slide, that reflect the ongoing subdued operating environment, particularly for Development, but also display the operating momentum into FY '23. Funds under management grew 12% to $44 billion. Assets under management grew modestly to $30 billion, while the group's Investment portfolio remained steady at $3.5 billion. Our development pipeline increased to $117 billion. Work in progress, the lead indicator for development completions climbed to a record $18.4 billion. Completions in the FY '22 year as flagged were low at $2.5 billion. In Construction, revenue was modestly higher at $6.6 billion, and new work secured was down on the prior year at $5.3 billion, with lower origination in the Americas. Backlog revenue declined approximately 5% to $10.5 billion. To demonstrate the momentum across the group, we've provided the split by half year for our key financial and operating metrics. Core operating profit after tax improved from $28 million in the first half to $248 million in the second half, and we returned to profitability on a statutory basis. The Investments segment has solid momentum across both halves. Development is the segment, which has gathered the most momentum. This underpins our confidence in achieving our target returns from FY '24. Commencements lifted from $1.5 billion in the first half to $4.4 billion in the second half, and completions recovered from $200 million in the first half to $2.3 billion in the second half. For Construction, revenue was marginally up in the second half, while the new work secured rose from $2.4 billion to almost $3 billion in the second half. I'll now hand over to Simon.

Thanks, Tony, and good morning, everyone. Turning now to our financial performance on Slide 8. Core segment EBITDA of $809 million was down 12% on the prior year with higher earnings from the Investments segment, more than offset by lower earnings from the Development and Construction segments. The Investments segment delivered EBITDA of $497 million, up from $276 million. The recovery in performance was driven by higher Investment portfolio and funds management earnings, which more than offset a lower contribution from asset management earnings. Investment portfolio EBITDA was $356 million, up from $111 million. Improved asset level performance supported a recovery in underlying investment income with an investment yield of approximately 5% across the portfolio, up from approximately 3% in the prior year. Profits from capital recycling initiatives included $167 million pre-tax associated with the part divestment of the asset management income stream of the U.S. Military Housing portfolio. Funds Management EBITDA rose 25% to $94 million, driven by base fees growing in line with higher funds under management and acquisition fees from investments in Asia. Asset Management EBITDA of $47 million was down from $90 million. The prior year includes fees from the $1.3 billion of redevelopment activity that was secured across the U.S. Military Housing portfolio. The Development segment delivered EBITDA of $181 million, down from $469 million. The lower contribution reflects fewer completions and the impact of the change in approach on joint venture projects. The prior year included contributions from the development joint ventures formed on One Sydney Harbor, Towers 1 and 2. They generated approximately $325 million in EBITDA, including the revaluation uplift on our retained interest of 75%. The decision to improve earnings quality by more closely aligning profits with cash and risk alongside a low point in completions is reflected in the lower EBITDA contribution from the urban portfolio of $165 million compared with $427 million in the prior year. The divestment of the remaining 20% interest in Sydney Place was the largest contributor to the result. The building is approximately 75% pre-let and is scheduled to complete in the coming months. Origination fees from the financial close of the Northeast Link and Frankston Hospital PPPs were also strong contributors. While the communities business recovered in the second half and returned to profitability, weather disruptions pushed out the timing of expected settlements. EBITDA of $16 million was down from $42 million. The more than $1 billion in pre-sales we carry into FY '23 is anticipated to underpin higher settlements and profitability in the current year. The Construction segment delivered EBITDA of $131 million, down from $173 million in the prior year. The result was adversely impacted by productivity delays relating to COVID, lower new work secured and increased cost pressures due to inflation and supply chain challenges. Notwithstanding these challenges, we delivered a resilient performance, supported by our strong client relationships, risk management approach and dedicated teams. Corporate costs of $180 million were 12% higher due to a combination of one-off items in the current and prior years. Excluding these one-off items, corporate costs would have declined. Depreciation and amortization charges were a little changed at $146 million. Net finance costs of $116 million were lower with lower commitment fees, including the reduction of approximately $500 million of committed lines during the year and lower average drawn debt. The average cost of debt was unchanged despite base rate increases due to the high proportion of fixed rate debt. The approximate 5 percentage point rise in the effective tax rate to 24.7% reflects the change in the geographic mix in earnings with a higher contribution from the Americas and the movements in deferred tax assets in offshore regions. Core operating profit after tax was 27% lower at $276 million or $0.401 per security. The reconciliation of core operating profit to the statutory loss of $99 million on an after-tax basis is non-operating items of negative $333 million and a noncore segment loss of $42 million. Non-operating items include $70 million of investments segment valuation uplifts. I will address the non-operating items that directly relate to strategic initiatives on the following slide. The noncore loss primarily reflects costs associated with the exit of the services business in FY '22, including a tenancy impairment now that the workspace is no longer required. We have maintained provisions we consider are appropriate to complete our share of the retained Melbourne Metro project and for potential warranties associated with the now exited engineering and services businesses. Moving to slide now -- Slide 9, covering expenses relating to strategic initiatives. We have extracted significant savings from the simplification of the group's operating model. Recurring annual savings are $172 million, exceeding our target of more than $160 million pre-tax on an annualized basis. This is comprised of $121 million in people costs relating to a headcount reduction of more than 400 with the remainder in tenancy and other savings. More than $90 million in savings were recorded in FY '22 with the full year run rate benefit to flow through into FY '23. Restructuring charges of $170 million pre-tax were incurred to implement these changes at the top end of the range we provided at the half year result. In relation to the development impairment, we managed to generate some upside compared to our expectations at the half year. The impairment expense of $289 million includes a write-back of $10 million in the second half. The actions we have taken on these development projects will expedite the release of capital to deploy into higher returning projects. Following a review of the group's digital activities, we have decided to adopt a more focused product offering going forward. An intangible impairment expense of $55 million was incurred due to the discontinuance of the development of some products. Turning now to Slide 10, cash flow. The group commenced the year with cash and cash equivalents of $1.7 billion. Movements during the year comprise operating cash outflow of $835 million, investing cash inflow of $552 million and financing cash outflow of $106 million. The group measures underlying cash flow to enable an assessment of cash conversion. The measures are derived by adjusting statutory cash flows with the largest adjustment relating to the impact on cash flows from investing in development projects. Underlying operating cash inflow was $514 million, representing a cash conversion ratio of 82%. We and adjusting for weaker cash flows in U.S. Construction, largely a function of a reduced working capital benefit from lower activity, the conversion ratio was 97%. Operating cash flow relating to noncore and non-operating items were neutral. In total, we expect an additional $800 million of cash outflows out to FY '26 relating to noncore activities as we run off the provisions and the working capital unwinds. Underlying investing cash outflow was $482 million, continued investment across key development projects in delivery, as well as equity contributions to the new industrial fund and Lendlease Global Commercial REIT were the main items of expenditure. Proceeds received from the sale of the services business, the divestment of a 25% interest in Retirement Living and the sale of the remaining 20% interest in our Sydney Place development were the main sources of investing cash inflow. The group closed the year with cash and cash equivalents of $1.3 billion. Moving to the group's financial position on Slide 11. Invested capital of $8.1 billion is allocated $3.7 billion to investments, $5.4 billion to Development, while other includes Construction, which benefits from negative working capital and noncore, which comprises both provision balances and negative working capital. The $1 billion increase in the Development segment relates to the acceleration of expenditure ahead of higher completions. Key projects utilizing additional capital include One Sydney Harbor, the Exchange TRX and Ardor Gardens. The movement also includes a $0.2 billion reduction related to the impairment of development projects. Our expectation is that approximately $6 billion of capital is required to consistently fund our share of the more than $8 billion of completions per annum. The greater use of investment partnerships facilitates capital efficiency, where less of our capital is required to fund incremental work in progress. In the Investments segment, capital is expected to rise from the current $3.7 billion towards $6 billion by FY '26. Importantly, we have the capacity to fund our share of this significant growth potential, while maintaining our financial leverage within target range. From a treasury management perspective, the balance sheet remains in a strong position with gearing of 7.3% below our 10% to 20% target range. We expect that to rise towards the midpoint of the target range during FY '23. Our available liquidity is down from just under $5 billion at FY '21 to $3.9 billion. We reassessed our liquidity needs and subsequently reduced some unutilized facilities, which will generate savings from improved treasury management. We believe this still places the group in a strong liquidity position with $1.3 billion of cash and cash equivalents and $2.6 billion in available undrawn committed debt. The average drawn debt maturity increased to 6.6 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. Of the group's total facilities, 60% or $3.1 billion are green or sustainability linked. Investment-grade credit ratings continue to form an important component of our financial strategy. We measure our segmental returns against the targets in our portfolio management framework. Return on invested capital of 9.7%, the Investments segment outperformed both the anticipated range of 7.5% to 8.5% provided at the half year results and the segment target range of 6% to 9%. Returns were boosted by the part disposal of the asset management income stream of the U.S. Military Housing portfolio, as well as a recovery in portfolio income and higher management fees. The Development segment return on invested capital of 2.2% was towards the lower end of the expected range for FY '22 as we indicated, was probable in early May of this year. This compares to the target range of 10% to 13%. Fuel completions and the impact of the change in approach to our joint venture projects discussed earlier were behind the low returns. The Construction EBITDA margin of 2% was at the bottom of the 2% to 3% EBITDA target range due to the lagged impact of COVID. There are supply chain disruptions and related cost pressures. The margin decline in the second half predominantly relates to timing issues and one-offs. With that, I'll now hand back to Tony.

Thanks, Simon. The cornerstone of our strategy is to create the best precincts, utilizing our real estate capabilities in key global gateway cities. While there remains a degree of uncertainty, cities are springing back to life and are embracing a new normal. We believe the most desirable cities will continue to be the driving force of economic, social and cultural life. Highlighted on this slide are the metrics across our 3 operating segments and mapped our target gateway cities and our key urban projects. Turning now to health and safety on Slide 14. As always, getting our people home safely each day remains our highest priority. 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. Tragically, we had a fatality during the year, a subcontractor of one of our construction projects in New York, in our work zone under subcontractor management was fatally injured. 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 to provide a consistently high standard and operating discipline that defines the Lendlease way for managing health and safety. We recently refreshed our GMRs. This is our fourth addition, which addresses updated work practices, incorporates lessons learned and applies a specific focus on the health and well-being of our people. The application of our GMRs has been a key operational driver in improving safety performance of the group. Several of FY '22 performance indicators achieved best on record results for the group during the year. Demonstrating leadership and sustainability is a strategic priority for the business and always has been. Our Mission Zero road map set out specific strategies across our operating segments to eliminate scope 1, 2 and 3 emissions with a target to be absolute 0 emissions by 2040. For investments, our Barangaroo Office Fund was ranked #1 out of approximately 1,500 in the 2021 Global Real Estate Sustainability Benchmark, and we had 4 funds ranked in the top 10. Overall, the Lendlease fund has achieved the world's most sustainable fund for 7 of the last 8 years. In development, we are increasing the number of all electric developments in our portfolio, including at 1 Java Street, New York and La Cienega, Los Angeles. We've also raised $1.2 billion across 3 green bonds to help fund our global pipeline of sustainable projects. From a Construction perspective, we continue to collaborate with suppliers to progressively source and procure low embodied carbon materials. We partnered with the University of Queensland to investigate the range of low and zero-emission technologies to transition construction sites. Since launching our social value target in 2020, we have created more than $100 million of social value through the work of our shared value partnerships supported by the Lendlease Foundation. Turning now to our core operating segments beginning with investments on Slide 16. We are targeting funds under management of greater than $70 billion by FY '26, with growth to come from the development pipeline, investment alongside partners in our existing funds and the launch of new products. And initiatives progressed during the year keep us on track to meet that target. The 12% growth in funds under management to $44.4 billion was underpinned by the launch of several new product launches, which included the new develop to core Industrial Fund in Australia. In the last 12 months, we have raised $11 billion in investment capital across 6 new products, which supports the execution of both our develop to core strategy and our pivot to acquire assets in the secondary market. Pleasingly, we have now created 2 new products in FY '22. REP4 in Australia and the Lendlease Asia innovation partnership to acquire value-add assets in the secondary market. The group's urban development pipeline includes $64 billion of investment products across commercial and residential for rent assets, and this is expected to underpin future fund growth. Assets under management are likely to remain broadly stable over the coming year. Asset management earnings are expected to decline following a 2-tranche sale, including 1 post-balance date of the asset management income stream of the U.S. Military Housing portfolio. Moving to our investment portfolio on Slide 17. The group's strategy is to reweigh our capital allocation, investing more in stable and recurring investments. We are targeting to have 50% of the group's invested capital over time in stable recurring investments. This will include retaining a larger proportion of completed assets from the development pipeline and investing alongside partners through the launch of new products, such as those noted earlier. While the recovery in underlying investment income across our co-investments was encouraging, the significant driver in earnings in FY '22 came from disposal of 28% of the asset management income stream from the U.S. Military Housing portfolio. Post balance date, we sold a further 13% to the same investor. This will contribute approximately $50 million to NPAT in the first half of FY '23. The 2 tranches were divested on a weighted average multiple of 25x estimated 23x NPAT. The group's investment portfolio closed the year at $3.5 billion, consistent with the prior year. We invested in industrial portfolio joint venture and increased our capital invested in the Lendlease Global REIT via the participation in the recent capital raising. This was offset by the further 25% sell-down in the Retirement Living business in Australia. Focusing now on the Development segment on Slide 18. We take solid momentum into FY '23. The $5.9 billion of commencements in FY '22 compared with the low completions of $2.5 billion has taken work in production to a record $18.4 billion. The communities business sold 3,100 lots back within our target sales range of 3,000 to 4,000 per annum. This equates to a value of more than $1 billion at the start of the new FY '23 financial year. It's the highest level it's paying for more than 8 years. We also had several large urban portfolio commencements in the second half of FY '22, including apartments for rent at 1 Java Street, New York, Life Sciences at 60 Guest Street Boston, Watermans Residence, One Sydney Harbor and a data center in Tokyo. This supports a substantial upward trajectory in completions over coming years. Based on the current work in production, approximately $4 billion of completions are expected in FY '23, climbing to approximately $8 billion in FY '24 and approximately $6 billion in FY '25. The conversion of the existing pipeline is the key to achieving our greater than $8 billion of annual completions. To end -- to that end, more than $8 billion of the pipeline received master plan approval in FY '22. We'll continue to selectively add to the pipeline with a focus on Australia and Asia, more than $4 billion in new projects were added to the pipeline in FY '22. From FY '23, we are targeting commencements of more than $8 billion per annum. 30 Van Ness commenced early in the new year and other expected commencements, including 1 Circular Quay; La Cienega; Milan Innovation District; and Silvertown in the U.K. Moving now to Slide 20 and the Construction segment. We delivered a resilient outcome with our teams implementing a range of mitigation strategies to offset ongoing COVID impacts, various supply chain disruptions and related cost pressures. Our modest rising revenue was driven by a solid recovery in Australia that was largely offset by the decline in Americas. Asia and Europe were both flat. New work secured of $5.3 billion was down from $6.9 billion in the previous period. Australia secured $3.6 billion, up from $3.1 billion, underpinned by social infrastructure projects, including the Frankston Hospital redevelopment and the Powerhouse Parramatta. Backlog revenue was down by 5% to $10.5 billion and remains diversified by client type and sector. Australia has a strong workbook with $7 billion in backlog revenue. The business is preferred for $4.6 billion in new projects, including several social infrastructure projects in Australia and the Americas. 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 financial year with significant momentum, providing confidence, we enter the CREATE phase of our 5-year road map. We anticipate this to be reflected in an improved financial performance in FY '23. Consistent with previous years, there is a skew to the second half. While we have to-date managed through the inflationary and supply chain pressures, there remain risks for the group, along with the potential impact of higher interest rates. The return on invested capital for the Investment segment is expected to be in the range of 6% to 7.5% for FY '23. The urban development pipeline is expected to continue to provide the predominant source of future growth for the Investments platform, although new initiatives will be pursued selectively alongside our investment partners. The return on invested capital for the development segment is expected to be in the range of 4% to 6% for FY '23. Higher commencements and a record amount of work in progress are driving a recovery in both completions and profit over time. We remain on track to meet our $8 billion completion target in FY '24, along with return on invested capital target of 10% to 13%. The EBITDA margin for the Construction segment is expected to be in the range of 1.5% to 2.5% for FY '23, due to the lag disruption from the pandemic cost pressures and supply chain constraints. These risks have been well managed to date, but their persistence could potentially impact performance in FY '23. We'll now open up to questions.

[Operator Instructions] Your first question comes from Stuart McLean from Macquarie.

First question is just on Construction. If you just put in mind running through and why you think you could miss the 2% to 3% range for EBITDA margins in FY '23? And what are you factoring in to -- if it was to be that 1.5%? And then what are you seeing in terms of cost inflation coming through at the moment, please?

Thanks, Stuart, for the question. I mean, if you look at where the business came in, in FY '22, we hit the middle of the range at 2% that we provided our outlook. So we are saying that we'll be in that range of 1.5% to 2.5%. And that is factoring into -- we have had slower productivity through COVID through the last 12 months, and we have had inflationary pressures within the group just in terms of what we've seen. So we see those risks persisting over the coming 12 months. That's why we've just called our range and lowered that by 50 basis points downwards, just to make sure we're reflecting where the risks lie in the market today for the outlook.

Can you run through what you are seeing in terms of that cost inflation piece, please?

What I would say on the cost inflation side of things, we have managed through the cost inflation pressures quite well over the last 12 months. We're probably seeing some early signs of commodity prices coming down, but we will need to just reflect that through the business. And I mean, of course, those commodity prices always do flow through to materials, and we'll keep a watchful eye, but early signs is we've seen -- we may see some of that pressure still remain. I think when we look at wages, and I think like across all markets we've seen a level of wage pressure across a lot of the different parts of the globe that we operate within. The other thing is within the U.S., I'd call out that our workbook is about half the size of where we normally are. But like everything, we'll be disciplined in terms of the work we try to win. We are carrying the cost of probably some higher teams as we ride through this phase of the cycle as we're looking to move through that 323. So we do have some higher costs there because we're not going to just win work that's not going to be profitable in future years.

And just a continuation, how does rising cost inflation, is that going to impact your ROIC or your commencements going forward in Developments, please?

Look, I think we've flagged that we are looking to continue to work through our Development book, and we're targeting to commence some $8 billion of work within FY '23. I mean as you can see in the second half of the year, we had some very positive momentum with $4.4 billion of new commencements. I mean there's 2 things in the Development side of the business, we do factor in, about 70% of our development portfolio is land management deals, which allows us to operate through the cycle because we do price the deal based on the current construction prices in the market. So I think that's probably a benefit for us as we continue to try to drive that right level of volume through our portfolio. On the Developments, we are -- recently, we have started, for instance, as I've called out 30 Van Ness. We have started like One Java, but we are seeing some inflationary upside in rents in the market or some of the sales process. So it's a balance between looking at how the revenue line is moving versus how the cost line is moving, and we'll be disciplined on what we start and don't start.

And second question, just on the capital expectations. Can you give a guide of where you think capital might finish the year in development and in investments, please?

Simon, did you want to…

Yes, I'll give it. Thanks, Stuart. So we've got -- we've given the detail on capital at year-end '22 with investments of $3.7 billion and development at $5.4 billion. So that's $9.1 billion in total. We've also guided that we expect our leverage to increase to the midpoint of the range, the 10% to 20% range. So taking that sort of incremental capital into account, that will be deployed across both developments and investments. We do need to continue to bring into production our development pipeline. As part of our strategy, we did mention at the half year that capital would skew initially towards development during '22, '23 before balancing out as we move forward. And then by '26, the plan was to have $6 billion, roughly $6 billion allocated to investments and $6 billion to development. So, I think you could, in terms of your assumptions, assume that that incremental capital, taking the midpoint of the 10% to 20% gearing range is allocated roughly proportionally to developments and investments based on where the capital is allocated today.

Great. And just a final one from myself on the cost out. Is there any ability to continue to gain further cost out from the $172 million achieved? And have you hit that run rate of $172 million in the second half of the year? Or should we continue to expect further developments into 1 half '23, also further benefits into 1 half '23?

Yes. I think it was pleasingly firstly, that we did achieve the target we set and outperformed that target as you pointed, we came in at that $172 million. What we will be looking to do is, I think, like all organizations once you look at the market and see the inflationary pressures, we'll continue to look for opportunities where we can gain some productivity. And so that is a focus of my management team and myself to make sure we continue that. I think on the run rate benefit, I would leave that question to Simon. I think we…

So the -- yes, I mean we're there in terms of the run rate benefit. So we'll get the full benefit of that in FY '23. We got the partial benefit in FY '22. Most of it came through in the second half, some $90 million, but we'll get the full benefit of the $172 million pretax into FY '23. In terms of additional costs out. We haven't gone out with any number. I think that there will continue to be opportunities, as Tony has alluded to, as we continue to refine the operating model and drive productivity through the organization, but it certainly won't be to the same quantum as what we've seen and announced in FY '22.

Next question is from the line of Sholto Maconochie from Jefferies.

Just on the write-back of the $10 million was -- in the impairment charge in the second half, was that Elephant Park, the better rental assumptions? Or can you elaborate on what that was?

No, it wasn't Elephant Park. It was just a small outcome as we noted that there are a number of projects. I think we highlighted that would have been made up of Deptford and Water Bank and a number of those projects. So it was really just those projects getting to some final outcomes. We've started to move forward on some of those sales progresses and the like. And so we had a better outcome and something we had assumed in the second half…

It was -- to be fair, it was not a refinement of an estimate, it was an actual outcome.

Yes.

Okay. And the renting has been a bit better at Elephant Park in London. Is there going to be potential write-back in '23 on that?

Look, there was a guarantee that still stays on foot. At the moment, we've now leased some 98% of those units out of the 663, which is a great outcome. And we're starting to see -- circle through the re-leasing phase that we're going through about 4% rental growth. That's positive that we're starting to get that momentum. I mean we'll assess it, but we've -- the guarantee did run for a number of years, so we have not re-leased any of that provision this year.

Another way to put it, I think you're below on the initial underwrite, but are you probably ahead of the -- what you assumed in the impairment last year at the current run rate?

At the current run rate, I would say we're tracking well, but there's still a lot of time to go forward. So we'll continue to update the market in due course on that.

Okay. And then just on your payout ratio, I think you touched on the call that the Board thinks around the low end, you're normally a bit higher than the 40%. So given the development work in progress and starts and targets, is it fair to say it will be 40%. Is that sort of where you expect to be in the medium term until you get to that target production level?

Yes. I think ultimately, the Board will determine the final payout. But as management, we did recommend that we think we should be in the short to medium term at that lower end of the range. It does give us some more capital flexibility by being able to manage the dividend at that 40% range. So -- and ultimately, we are looking at what we're paying is frank dividends and unfranked and trying to keep that right balance for all our security holders.

Yes. I guess I would add to that also that although perhaps anchoring expectations towards the lower end of the stated range of 40% to 60% in the short to medium term, we do expect that dividend or distribution to move up steadily over time as earnings continue to improve.

And then did you resolve the services, I think the disputed payment. Is that being resolved or it's still ongoing?

No, that was relating to the engineering business, which we solved, yes, some years ago. We're still in the courts working on that matter.

Okay. And then on the Military Housing, what was the -- your rationale or so. I know you're flagging to sell down a further 13%. Was it the pricing was attractive or just was it sort of noncore from the balance sheet perspective?

No. As we stated when we entered the initial transaction, we were looking to sell down up to 50% across all our SPVs and what we've now done is 42% of that has been able to be realized. And so it's quite pleasing that we've achieved a 25x across both of those 2 transactions. The remaining 8% relates to a project that we continue to look to restructure, so we may have some potential to do that into the future. But we'll now keep 50% of that revenue stream across asset management. We've got 100% of our equity position. We continue to earn our Development and Construction management flywheel, so it was really just being strategic at the right time to realize value for our security holders.

And then, in the press, there was a Construction, it said on the sale of the plant. And what was the profit contribution of that in Construction to [ Marina ] group revenue?

Look, it's -- we're relatively down, that was in the first half. So there was -- I think the pre-tax was 12 -- roughly $12 million on that $15 million.

Okay. Construction, obviously I think you touched on it, there's a bit of a wide range of below target. Is it the U.S. sort of a drag because you highlight you saved -- you've got a bit of head count in anticipation of recovery. Is that part of the prudence in that number, returning headcount to grow the business when it returns?

Yes, that's spot on. I mean we've shifted the range down by 50 basis points each side, so 1.5% to 2.5% versus 2% to 3%. And it is factoring in the pressures that do exist in the marketplace, but we are having to hold the team together, because we don't want to lose the team in the U.S. as our workbooks half the size. So again, it's about being disciplined in construction, winning the right work for the future. So we have taken that strategy going forward.

The next question is from Simon Chan from Morgan Stanley.

On Development outlook for FY '23, I was wondering if you guys could give us some insight as to which are the major projects that should be contributing to the EBITDA, how risky they are or how de-risked they are, Tony?

Yes. Look, the $4 billion relates to certain projects that we've got on foot. I mean what I would say is you do need to remember across our development workbook, we do have -- we still have the traditional older JV structures, which are winding off from some of the key completions. So a couple of things to note. We have the positive momentum that we've achieved in the communities book across the business. Then when you look at some of those projects, we have Elephant Park, the City Lights Point building. We have in New York, 100 Claremont that's completing. And then across the business, some of those, we've got ownership in the City Lights project of 50%. In Claremont, we've got about a 32% because that, again, is in partnership with another developer that we've currently got on foot. So, communities will be a big component, as we've Simon and I flagged, there's $1 billion worth of communities work that we've now secured and through the 3,100 sales this year. So we'd expect our settlements to improve materially there. So they're probably the big drivers of that result.

And TRX Retail seems to have slipped into FY '24 for completion. What's the reasoning there? Is that a strategic shift? Or is that more construction or leasing delays?

It's more a -- it's being based off COVID. The market has had a shortage of workers as like all markets as immigration has been down, markets like Malaysia do rely on a large proportion of farm workers, we've programmed out our completion of that project over time. We're just going to be running at a lower workforce going forward. But when I look at the performance of the project, we sit at 55% leased today on the retail with another 10% in final negotiations, which will take us up to about 65% and our sales on the stock we've released to date, we've sold about 58% of those sales and slightly above the commercial assessment that we've put to market. So more -- this is about this timing from the impacts of COVID and giving the team the right runway to complete that project safely.

Great. My last question. Can you just confirm for us, Tony, that the wet weather recently in Australia has not resulted in any delays to major project timings such as One Sydney Harbor, et cetera?

No. One Sydney Harbor and those projects are remaining on track. I mean, of course, we did flag weather impacts across our communities business. It has impacted other parts of our construction portfolio, depending on which stage certain projects are up. But the One Sydney Harbor projects are well out of the ground at this point. So it hasn't had a material impact on those projects.