Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Lendlease's FY '24 Results Briefing. [Operator Instructions] I must advise you that this call is being recorded today, Monday, 19th August 2024. I would now like to hand the call over to Mr. Tony Lombardo, Group Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining the Lendlease 2024 Results presentation. I'm Tony Lombardo, Chief Executive Officer and Managing Director of Lendlease. With me is Simon Dixon, Chief Financial Officer. Sitting here Barangaroo in Sydney, we're on the land of the Gadigal people, and I extend my respect to their elders, past and present. Today, I'll provide an overview of our FY '24 results. Simon will then talk through the financials before handing back to me for strategy and outlook. We'll then open for questions. Starting with our strategic direction on Slide 3. In May this year, we announced a refreshed strategy to position Lendlease for financial success, a strategy that leverages our proven core strengths and competitive advantages. We've already made great strides as we removed our regional structure to reduce our costs, divest international construction, accelerate capital release from international development and introduce a new capital allocation framework that prioritizes reducing debt, returning capital to securityholders and investing for growth in our market-leading Australian business and international investments platform. Turning now to performance and operations. Starting with our strategic progress and operational performance on Slide 5. Since announcing our refresh strategy in May, we've moved quickly to implement a series of major changes to the business with strategic execution progressing. Central to strategy is the establishment of a Capital Release Unit or CRU that will liberate more than $4.5 billion of capital from the business, substantially reducing debt and strengthening the Group's balance sheet. This should also provide the flexibility to return capital to our security holders and reinvest for growth. We've made strong progress towards our FY '25 divestment target of $2.8 billion, with $1.9 billion of transactions already announced. They include the sale of 12 communities projects in Australia, which is subject to an anticipated ACCC division in September. The sale of our U.S. Military Housing business and the completed sale of our Asian Life Sciences interest into a new joint venture with Warburg Pincus. And we are targeting more than $900 million of further capital recycling in FY '25 from sale processes that are already underway. These include our 25% investment in Australia's Keyton retirement living, Ardor Gardens in China and our interest in the newly completed Exchange TRX retail asset in Kuala Lumpur. We have removed our regional management structure, helping to further simplify the Group and increase our focus on segment performance. We've announced a further $125 million of pretax run rate cost savings, and we anticipate achieving this run rate by the end of FY '25. Our divestment of international construction has also progressed with terms agreed in principle for the sale of our U.S. East Coast operations to Consigli, and preparations underway for the sale of our U.K. Construction business. Operationally, it's been a productive year with $3.4 billion of underlying growth in funds under management, more than $8 billion of development completions and closing the year with $10.6 billion in preferred projects across the Australian construction workforce. Transactions announced today, together with further contracted settlements at One Sydney Harbour are anticipated to deliver cash receipts in the order of $2.4 billion in FY '25, supporting the strengthening of the Group's balance sheet. We have achieved our target of removing more than $60 million of overheads from the business in FY '24, in line with our steadfast commitment to safety and through our relentless focus on this critical area, no fatal incidents were recorded across the portfolio during the financial year. We remain on track to reach our target of net-zero carbon by FY '25 for Scope 1 and 2 emissions and creating $250 million of social value by FY '25. Moving now to the FY '24 financial results on Slide 6. Core operating profit after tax for the year was $263 million. While supported by development completions in the second half, the result was impacted by transaction timing with delays in the completion of the Australian community sale and the Asia Pacific Life Sciences joint venture. Core operating earnings per security were $0.381 equating to a return on equity of 4.4%, distributions per security totaled $0.16, unchanged from the prior year, representing a payout ratio of 42%. The Group recorded a statutory loss after tax for the year of $1.5 billion, which included $1.38 billion of impairments and charges required to implement the refresh strategy. This equated to a pretax charge of $1.46 billion, which was within the previously estimated range. Additionally, there was a $260 million post-tax revaluation loss on property investments within the Investment segment and $95 million of restructuring costs from business optimization initiatives announced in July 2023. Gearing of 21% includes a 1% impact due to strategy-related impairments and charges. There is a clear pathway to deleverage the balance sheet from the announced transactions and contracted settlements. Simon will talk to this later in the presentation. Listed on Slide 7 are a selection of key operational highlights. In investments, our new Asia Pacific Life Sciences joint venture was established and the sale of our military housing business was announced. In development, there were several completions this year that created developed the core investment product, including Melbourne Quarter Tower, The Reed in Chicago, The Exchange TRX and Phase 1 of our data center in Tokyo. This activity was supported by residential for sale completions, including Residence One, One Sydney Harbor, Claremont Hall in New York and Park & Sayer in London. In construction, 2 integrated metro stations at Martin Place and Victoria Cross were completed, making a significant milestone in Australia's largest public transport project. Our investment segment earnings highlighted on Slide 8 are derived from funds and assets under management and contributions from our directly held co-investment portfolio. Despite challenging market conditions, we grew core funds by $3.4 billion from developed to core products. This was more than offset by negative market revaluations. Funds under management reduced slightly to $47.3 billion. Assets under management increased 3%, driven by the completion of the Exchange TRX. The Group's investment portfolio was down 8% to $3.6 billion. Deployment of capital in the first half into APPF Retail was more than offset by revaluation impacts and asset divestments, including the sale of Darling Square. The portfolio remains well diversified with the primary weighting to workplace, residential and retail assets. The portfolio's performance improved during the year, generating a distribution yield of 3.3%, up from 3%. Stabilized assets in the portfolio generated a distribution yield of 3.5%. Future growth will be underpinned by the investment products we create from projects currently in delivery and our development pipeline. In addition, we'll look to leverage our capability to source and deliver new investment products alongside our investment partners. International projects underway with our capital partners are expected to add more than $6 billion in FUM over coming years. Turning to development on Slide 9. Development activity increased with $8.2 billion of completions with key completions already mentioned and $1.9 billion of commencements, including a residential build-to-sell project at Elephant Park in London with Daiwa House and luxury apartments at Victoria Harbour in Melbourne. We've secured a new project in Melbourne at the Queen Victoria Market precinct. This major urban project has an end development value of $1.3 billion and is set to include both sustainable workplace and build to rent apartments. In addition, Scape will develop and manage a $400 million student accommodation tower within the precinct. The post balance date, we also secured a $500 million luxury apartment development, One Darling Point in partnership with Mitsubishi Estate Asia. Our luxury residential developments continue to perform strongly with 89% presold by value across the remaining One Sydney Harbor assets and 70% presold at One Circular Quay due to complete in FY '27. Leasing progress was achieved across the portfolio included at our recently completed retail asset, the Exchange TRX in Kuala Lumpur, which is now 98% leased. Several tenants were secured across Town Hall Place and Melbourne Quarter Tower in Melbourne. In North Sydney, Victoria Cross secured its first tenant, and there is increasing tenant interest with the opening of the metro station today and had a practical completion targeted for the second half of FY '25. In Communities, FY '24 settlements of 2,237 were down marginally from 2,253 while sales of 1,721 were down on the prior year sales of 1,765. Turning to the outlook. Our Australia development pipeline has an estimated end value of approximately $12 billion. We're in advanced stages of securing up to $13 billion of opportunities across 5 projects. where we have either 1 or 2 or in exclusive discussions. In addition, we are assessing a further $27 billion of early-stage opportunities, which are concentrated on the East Coast of Australia. Moving now to the Construction segment on Slide 10. Operational changes were made during the year as we seek to improve the risk return profile of the business and divest international construction operations. This included the announced wind down of the U.S. West Coast and Central Operations and terms agreed in principle for the sale of the East Coast operations. Progress was made in Asia with the sale of the majority of our Asian construction business into a new life sciences joint venture with Warburg Pincus. In the U.K., preparations are also underway for the business sale. New work secured was marginally up on the prior year, led by an increase in European activity. The segment has a backlog revenue of $7.6 billion. Australian backlog revenue of $3.9 billion is weighted to government projects and is supported by strong preferred workbook of $10.6 billion, providing confidence in future revenues. We anticipate construction revenues to run at $3.5 billion to $4 billion a year into the future. I'll now hand over to Simon to talk through the financials.

Thanks, Tony, and good morning, everyone. Starting with our financial performance on Slide 12. Core segment EBITDA of $809 million was up 15%, with a lower contribution from investments EBITDA more than offset by higher contributions from development and construction. Investments segment delivered EBITDA of $174 million, down 48% on the prior year, which benefited from a further sell-down of the Military Housing Asset Management income stream that delivered $192 million of earnings. Development EBITDA was up 80%, with key contributions, including the completion of our first residential tower at One Sydney Harbour, delivering $183 million of EBITDA a payment received in relation to the San Francisco Bay Area project and completion of TRX retail and residential projects in Kuala Lumpur. These were partly offset by a $57 million negative revaluation at Victoria Cross in North Sydney primarily due to cap rate expansion. Construction segment EBITDA of $126 million was up 40%. Underlying financial performance, particularly on Australian projects, was impacted by supplier insolvencies that led to retendering for various goods and services. The estimate of the impact in FY '24 of those insolvencies was in the order of $50 million. The result also includes a $42 million gain from the remeasurement of the U.K. pension scheme liabilities. Corporate costs reduced 13% to $140 million, primarily from cost initiatives relating to headcount reduction. Core operating EBITDA of $669 million increased 23%. Net finance costs increased from $88 million in FY '23 to $238 million in FY '24. This movement included impacts from the buyback of sterling bonds in each year. The increase overall was primarily due to a higher average debt balance, reflecting peak development CapEx and carrying costs from delayed transactions and a higher average cost of debt. This was partially offset by a further buyback of the Group's sterling bonds. Tax expense was lower at $48 million, primarily due to a higher proportion of profits being derived from the trust. Core operating profit after tax of $263 million was largely in line with FY '23 profit of $257 million. Moving to the segment performance in more detail on Slide 13, starting with the Investment segment. While headline operating performance was lower with investments EBITDA of $174 million, both management EBITDA and earnings from co-investments increased in the year. Management EBITDA from funds and asset management activities increased 9% due to lower operating expenses. Co-investment EBITDA of $124 million was up 5%, driven by improved yields in workplace and retirement living assets as well as deployment of capital into the higher-yielding APPF Retail fund. The decrease in other EBITDA primarily reflected an absence of transactional profits versus the prior year and a final provision taken in FY '24 against the receivable from the disposal of the U.S. telecommunications business. Moving on to Slide 14. In the Development segment, stronger second half activity of more than $5 billion of completions resulted in more than $8 billion of completions for the year. EBITDA of $509 million was up 80%. This was underpinned by Residences One at Barangaroo, which delivered $183 million of EBITDA within urban development. The Communities business contributed EBITDA of $48 million, with the prior year benefiting from the higher margin settlements and the sale of industrial land parcels. The delayed completion of the community sale resulted in EBITDA of $40 million or OPAT of $28 million being recognized in FY '24, which would otherwise have been part of the sale. In the Construction segment, revenue was down due to lower activity across all markets, particularly offshore. EBITDA margin of 2.1% compared to 1.2% in the prior year, which reflects a higher proportion of revenue from Australia. The EBITDA margin for the Australian construction business of 1.7% was impacted by supplier insolvencies as mentioned earlier, that led to cost increases and project delays. Turning now to net debt on Slide 15. The increase in net debt to $3.2 billion includes $1 billion of gross capital deployed across development and investments, reflecting peak development capital. Non-core cash outflows for the year were $0.2 billion. Net cash proceeds in the order of approximately $2.4 billion are anticipated to be received in FY '25, equating to a pro forma FY '24 gearing benefit of approximately 15% and providing a clear path to deleverage the balance sheet. This includes $0.8 billion from apartment settlements of One Sydney Harbour and $1.6 billion from announced and completed transactions. Moving to capital management and treasury on Slide 16. While gearing of 21% is modestly above the Group's FY '24 target range, the capital recycling program is well underway. The Group maintained strong liquidity of $2.2 billion, comprising $1.2 billion of available undrawn debt and $1 billion of cash and cash equivalents. Debt maturity is well balanced with an average maturity of 3.4 years and no material maturities falling due in FY '25. Maintaining our investment-grade credit ratings remains a priority, and these were reaffirmed by both ratings agencies during the year. Slide 17 highlights our progress on cost initiatives. Over the past 2 years, the Group has removed approximately $170 million from net overheads. In FY '24, we achieved our target of removing $60 million of pretax cost savings from net overheads, removing $64 million of costs for the year. We are targeting further overhead savings of $125 million on a run rate basis to be achieved by the end of FY '25. Turning to Slide 18. As communicated at our May strategy update, material asset impairments and charges were required to execute the decisions arising from the revised strategy. Pretax impairments and charges of $1.46 billion have been taken at FY '24 within the estimated range provided at our May strategy update. The first component comprises $513 million of non-cash goodwill charges, which primarily relate to the 1999 acquisition of Bovis Construction. $217 million of deferred tax assets and $91 million of other costs were also taken. Other costs were $547 million which relates to specific international development projects and $91 million of redundancy, tenancy and other charges. I will now hand back to Tony.

Thanks, Simon. Moving now to Slide 20. As we have talked about, many decisive actions have been taken to simplify the business. To recap from our May strategy update, we have restructured the organization through the removal of regional management, commenced further reduction of costs and headcount targeting $125 million of pretax run rate cost savings by the end of FY '25, announced transactions for more than half of the $2.8 billion of capital targeted for FY '25. Agreed heads of terms for the sale of our U.S. East Coast construction operations and commenced preparations for the sale of our U.K. Construction business. Finally, we've established an Asia Pacific Life Sciences joint venture. Moving now to Slide 22, the FY '25 financial outlook. We are focused on growing and improving the performance of the Investment, Development and Construction segments. The primary focus of the Capital Release Unit is to accelerate the release of capital. Our Group earnings per security for FY '25 anticipated to be $0.54 to $0.62. This range includes $0.48 that is secured or highly probable, which comprises $0.36 from IDC and $0.12 from the Capital Release Unit. Finally, moving to Slide 26. In summary, we're taking significant strategic actions at an accelerated pace to leverage our key competitive strengths and simplify our business. I'm excited by the progress we've made since May, and we will continue to work hard to achieve our goals for FY '25 in the interest of all of our stakeholders, our security holders, our customers and our people. Thank you. We'll now open up for analyst questions.

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

I just wanted to get a feel for the asset sales this year. I think you were sort of talking to TRX, maybe Australian retirement and China as well. How are they progressing?

Thanks, James, for the question. So yes, the process is underway for each of those 3 divestments. We anticipate working on those throughout this next 12 months, but we've got TRX sale process well underway so that we expect that to hopefully materialize in the divestment of that. It's a very strong asset, and it's been performing well from its leasing and also just in performance from its day-to-day operations with strong visitation. In terms of the other 2 processes, both the retirement sales for both China and the Australian operations, we're working through ongoing processes there. We'll be anticipating to achieve some $900 million plus of proceeds across those 3 sales.

Okay. And does TRX have the office component in there as well? Or is it just the retail?

Yes. No, we're anticipating in terms of what we've gone to market is to have the office in that sale process as well.

Okay. That's great. And can you just talk to maybe the range of guidance, $0.54 to $0.62 what's driving the top end, the bottom end, how we should think about that?

Yes. I think this year, we've tried to standardize our approach to how we're giving guidance, and we've gone to what -- we've listened to the feedback firstly from our security holders. We're also better being -- we've been looking at making sure we match the market and how we give that guidance. I mean, the key 2 things from my perspective is really trying to demonstrate clear earnings that will come from the Investments, Development and Construction segments and also making sure that the CRU has been set up to extract value and accelerate that release of capital. I think the way we've approached it this year is, as you can see, there's $0.48 that we've called out, that is either secured or highly probable. And things that are secured are things like the base fees in the investments business, the construction secured workbook development management fees is what we're calling out, and also things like the settlements from One Sydney Harbour. When it comes to highly probable, we're looking at that we've got a number of transactions, which are progressing quite well, and we're still -- and we're feeling very confident in where we sit to hit that top line that you raised to get to the [ $0.62 ]. The business is working through a number of other transactions as we always do. They're in those early stages, and we need to secure those and that would derive from the $0.48 that we're talking about. That's another $0.14 on top where we're getting to. What we have also done is make sure we've allocated the appropriate funding costs of debt across both of the IDC and the CRU and also the appropriate corporate costs that sit against each of those segments to come up with that $0.36 and $0.12 ranges.

Okay. Any assumptions for Victoria Cross in that guidance?

In Victoria Cross, we're not assuming any profits this year from Victoria Cross. As you can see, Simon, stipulated for the year, there was a $57 million revaluation downwards in FY '24. And again, that was because of the expansion of cap rates. But we're quite positive on Victoria Cross. We're seeing today, it's a big milestone with the metro opening. We've got a significant amount of interest with talking and under negotiation with some 45% of potential tenants across the net lettable area on that asset. So I think it's in high demand, and we'll be hoping to announce various leasing transactions through the year.

Okay. So just to be clear, so there's no further write- down in Victoria Cross assumed.

There's no further write-down.

No further write-down, no profit assumed either. So it really -- that will be where it sits today is a function of the current view on cap rates and leasing. So any change to that will be a result of changes around cap rates and the actual leasing experience leading up to practical completion.

The next question comes from Suraj Nebhani with Citi.

Just a couple of quick ones. So firstly, on the development pipeline, I noticed that the numbers, the $40 billion and the $13 billion remains same as the strategy presentation. I was just wondering, are these June '24 numbers? Or -- and has there been any movement in those numbers since then? Obviously, we've seen some of the project wins go against you recently. So I'm just trying to think to just rationalize those pipeline numbers.

Yes. I think it is the same. We've left the presentation. And as you have called out, firstly, today, I want to announce that we've secured Darling Point One with our key partner, Mitsubishi, which is a $0.5 billion project that we've secured, and we'll be aiming to get that underway and delivering profits for the organization in FY '28. There have been a couple of projects that we were unsuccessful on such as Waterloo. The focus of the team is to replenish, but to replenish with real discipline to deliver our security holder returns. And we're looking for things that are more near term that will deliver profits in [ '28, '29 ] Unfortunately, that Waterloo project, we had anticipating delivering returns in FY '31. So our focus is really about building a sustainable pipeline for many years to come. And as you can see, we're highlighting a significant set of opportunities and $13 billion, which are more near term that we're either in an exclusive position or 1 of 2 where team is very focused on securing. Understood.

Understood. Thanks for that Tony. Maybe one for Simon. I know there's a fair bit of work that the team and you guys have done on the cost side. Can you talk to the outlook for our overheads across the business? And what are you anticipating out of savings rather are you anticipating into FY '25?

Yes, certainly. Thank you. We've got a separate slide that we've pulled out on overheads and focusing specifically on overheads rather than cost across the whole business, which is on Slide 17. I'm just reminded. That ties back to specific disclosure that we've now included in our statutory counts in note #7 for those inclined to kind of dig into the statutory accounts, you see all of the detail there. You recall we announced in May that we're targeting a further $125 million in cost savings on overheads and that's on a sort of full run rate basis. Specifically, that was the focus of that $125 million was on overheads. I think for FY '25, it would be reasonable to assume that we'll realize sort of half of those savings in FY '25 with the full run rate benefit of $125 million coming through in FY '26.

Got it. And that $125 million is -- there's obviously some expenses from that $125 million included in the recoveries line as well. So not all of it comes through the -- I guess, the net overhead, is that right?

I'm just giving you just to keep it very transparent and very simple, just giving you the net number. So that's the amount that we'll hit at the P&L.

Okay. Understood. So just to clarify, so you're sitting at [ $537 million ] in FY '24. So you think we should see around $125 million of production over the next 2 years based on what you're projecting currently?

That's right. We would expect that to track down towards [ $400 million ]. And obviously, we're continuing to work to find opportunities to continue to streamline and make the business more efficient where possible. But at this stage, you can expect that to track down towards [ $400 million ] through FY or by the end of FY '26.

Okay. And just one final one is around the -- again, sticking to the financials, Simon, it seems like the approach to guidance is changing into FY '25 where you're only, I guess, excluding revaluation from the core profit. So can you talk to any, I guess, any one-off type assumptions that you're making in your $0.54 to $0.62 guidance? Or any sort of stuff which is typically below the line that will now come above the line?

Yes. Thank you. That's a good question. It's a good point of -- a good reminder really in relation to how we define our operating profit, core operating profit going forward. So historically, we've been stripping out items which effectively couldn't be anticipated in the ordinary course of business, those one-off items that would include things like restructuring charges. Going forward, we're making it a lot simpler to the market. So the only adjustment from statutory profit will be investment property revaluations on -- through the Investment segment. So that's the only change. Now clearly, if you look at the results for the last 3 or 4 years, there have been a number of one-off items that have gone effectively below the line. A lot of these have related to restructuring initiatives. Obviously, we've announced in May a substantial reorganizational restructuring of the organization. We have been providing and book provisions for that in FY '24. So they are in the numbers. So going forward, we're not currently anticipating any large one-off items, which would historically have been recorded below the line under the old definition.

Got it. And sorry, just one final one before I jump off. Any further gains slightly on the buyback of sterling bonds into FY '25, or at least if you're baking that into guidance?

No, no. There's not and nor does that appear in guidance either. So I mean I think Tony is very clearly explained sort of guidance and the threshold we've used to secure and highly probable. But certainly, unless something you secured or highly probable, which is then it's not in plan, and it's not in guidance.

The next question comes from Ben Brayshaw with Barrenjoey.

Tony, Simon, just wondering if you could maybe just clarify, if we look at guidance, the $0.48 and the contribution from IDC based on the net assets at 30th of June, it looks like the ROE for IDC is tracking at about 12%. Would that be correct?

I would say that if you look at the way we've split guidance, it showed exactly how we split capital, but you can go back and look at exactly our capital balance, which I think it's at $3.8 billion for investments, and you've got $5.9 billion that's sitting across the development side. A couple of things I would say is that when we look at the current where we sit at [ $0.36 ] in terms of what we said is highly secured and highly probable -- I mean, sorry, secured and highly probable. I think that we're seeing us get close to our double digit. I think there are a number of transactions that we have on foot that we would like to see ourselves perform more closely to some of our historical returns when it comes to our cost of capital. So we do think '25, we're anticipating to be in that sort of double-digit territory for our overall return on equity there.

Yes, that's right. I think the -- I mean, [ Benny ], not too far off. We've got -- you'll be able to see our view on what the capital balances are within sort of IDC and CRU on a go-forward basis in the appendices to the presentation where we've included the pro forma financials on that basis, similar to what we did during the May Strategy Day. And the $0.36, that is trending towards a double-digit sort of return on equity, and that is very much in line with the historical performance of that business, which we called out in May. So again, it's effectively doing what it said it would do.

Yes. Terrific. And just finally, you pulled out some construction challenges in Australia with subcontractor insolvencies. I was wondering if you could provide any comment on Melbourne Metro and the visibility you have on that project going forward?

Yes. Look, Melbourne Metro is progressing. It's on track to open in 2025, which is the targeted time frame. We've still maintained all of our provisions and the project is over 80% complete now. So it's tracking to plan in terms of what we anticipated over the last sort of 12 months.

Just finally -- sorry, have you completed the buyback of the U.K. sterling bonds? Should we assume that essentially you're through that process?

Yes. Yes, Ben, there's no more that we're assuming on buying back any U.K. sterling bonds.

The next question comes from Tom Bodor with UBS.

Tony and Simon, just a question on the stabilized yield at 3.3%. I was wondering if that could get to, say, 4%, 5% over the next couple of years, that's sort of been around that low 3s recently?

Yes. So the distribution yield has been running at that lower level. We have been looking to drive it out. There are assets that have just completed and not stabilized. So we would be expecting over time some of those assets. And then we are aiming to really drive the performance there. One of the bigger factors over the last probably 12 months has been the cost of debt. When you look at long-term bond rates probably over the last -- since the strategy, I think they have dropped by about 80 basis points since May. So I think there'll be a couple of key things around just overall where we see rates going could be contributing impact to better performance. And then what I would say is underlying, we've had some better improvement through upwards reversions and the team are very much targeting to continue to drive that. And leasing across the whole portfolio has maintained a 95% level, which has been strong.

Yes. No, that's a -- just to remind, I mean that -- Tom, that's post interest and fees, that number. So to Tony's sort of point to the extent that one has a view on where rates are, there could be benefit, obviously, if rates start coming off in relation to that distribution yield.

That's clear. So even, say, the stabilized piece, which doesn't include the dilution from new farm, couldn't that get to say, 4% in the next 2 years? Or do you think it will take a bit longer to get back there?

I think there's -- again, I think the biggest factor we're calling out are probably rates. And to me, if I've seen some of the performance of the underlying uplift, I think directionally, we'll be aiming to close the gap to get closer to that fall.

Okay. And then just be interested to understand settlements at One Sydney Harbour, have they all been progressing to forecast? Or has it taken a bit longer with some of them? And subsequent to that also, that R3 Tower, I noticed the yield on that -- sorry, the margin on that's only 0% to 10%. Can you just elaborate a bit on that?

Yes. So I would say, firstly, settlements of tracking to plan. So they've all been certainly a targeted over this last 6 months, which has been very positive on the One Sydney Residence tower. We have been calling out that the Watermans Tower, which include a significant proportion of key worker housing and the like. It always had a lower margin attached to that product.

Okay. But 0% to 10% is very low. I mean, is that -- is there a particular issues in that project? And it's also only 70% pre sold??

Yes. It's -- to me, there's no issues. It's been moving along. Sales have moved through the period. And overall, as we called out, the 2 towers are over 89% are secured. So we'll anticipate that margin that we've called out in between that 0% to 10%.

Okay. Great. And then just a final one for me. Just the NTA of the CRU reduced by about $0.23. Just be interested in understanding what drove that shift lower.

Sure, Tom. It's -- I think the easiest way to think about that is just in terms of when we're putting out the estimates in May, is obviously based on an estimated balance sheet and taking the midrange of the impairment, the likely impairment charges and provisioning that we're looking to take. We obviously ended up at the top end of the range, not the midpoint of the range. So that really explains the difference in the NTA.

The next question comes from Richard Jones with JPMorgan.

Tony and Simon, just wondering if you could discuss how you think about the debt repayment from proceeds, obviously, on the sales that you're taking place, I guess, net of deployment into new development opportunities as to when you might commence a buyback?

Simon, did you want to go through our sources and leases...

Yes, sure. Thanks. Thank you. It's -- back in May, when we talked about -- if we look forward the next 12 months, obviously, the focus is on getting back the $2.8 billion that we've identified in that first phase in terms of capital recycling those on-market assets. With that $2.8 billion, we've effectively already allocated that. We talked about $1 billion being allocated to paying down debt. We talked about some $700 million to fund 8 joint venture CRU projects, some $600 million to fund on sort of the non-core side with BSA, the building safety in the U.K. and engineering and services in Australia. We have to fund redundancies, et cetera, which have come out of the strategy change. So the fall after that was about $500 million net for a security buyback. And really, I guess the key point to make is nothing has particularly changed since May in relation to that. We're obviously a few months further progressed. We continue to work very hard on recycling that capital. But just as a reminder, we did have, I guess, a number of conditions around the securities repurchase. And I do believe we included the slide again in the appendix, which will just go to management's intention. It hasn't changed, but it does remain dependent on a number of conditions. Firstly, we called out the completion of the communities transaction. Secondly, and I think it's important to note that gearing reaches our target 5% to 15% by the end of FY '26, irrespective of security repurchases. So we need a very clear line of sight that our gearing is going to be back to within that revised 5% to 15% range by the end of FY '26. Thirdly, it goes without saying that our credit ratings remain very important. So we need to be able to maintain those ratings. And lastly, it needs to be accretive to EPS. So subject to all of those conditions, nothing has changed. And clearly, as we work through our capital recycling initiatives, we'll have the opportunity to come back to market and explain our intention around that.

Okay. It's interesting. I thought you said the pro forma impact of the sales program was about 15% to gearing. Is that the right number you said?

Yes, that's right. Yes.

Okay. So that -- I mean, that has you at 6% gearing on a pro forma basis...

Yes. The way I think about that is the intention of including those effectively secured or contracted cash flows on that slide was obviously just to give an indication of the direction of travel. So we do believe we have the ability to bring our gearing down to those levels indicate the 5% to 15%. You shouldn't take that and it's assumed that's all that's going to happen in the sense that we obviously have outflows going the other way as well. So it's not just those inflows that will bring it down, but was to give an indication to the market that those cash flows that have been secured or contracted are very substantial, and we expect them to come in, in FY '25. So directionally, we're sitting at 21% gearing, so slightly above our FY '24 range at the end of FY '24. We're in the new range now in FY '25, 5% to 15% directionally, we would want to be tracking down towards the top end of that 5% to 15% range by the end of FY '25. And as we've said, we want to be within the range by the end of FY '26, that 5% to 15%. Okay.

Okay. Just the project realizations for FY '26 still look pretty skinny, and obviously, the timeframe from securing new work to be able to complete in that time frame is going to be challenging. Is there any other kind of avenues you have up your sleeve in terms of potentially bringing profits forward that you're thinking about for FY '26?

Yes. I think '26 when you look at Australia development pipeline, it will be a transition year because '27 is looking quite strong with one circular [ game ] what we've secured today that announced on Darling Point One will be something that contributes into FY '28. What I would say is in the CRU, there are a number of developments completing in FY '26. I do think that the CRU, as we've talked about it, its primary purpose is realization of capital. However, we do have a number of joint ventures that we will be managing. In terms of what are the opportunities in '26, I mean, as we're calling out, there are always across the investment management business, there will be potentially transaction fees and other fees that are an opportunity for the Group. There will be potentially other shorter-term deals that we'll be looking at that could be in that investment management space. But we'll be looking at the overall performance of IDC as we continue to move forward.

One of the -- I mean, you're right to call that out. It's -- one of the keys will be the pace at which we can recycle capital that's been identified for recycling. And then how quickly we can deploy that into strategies, which have an immediate yield with regards to '26.

Okay. So do you anticipate in the future that there'll be a much higher proportion of income that is identifiable through the investment division day 1 of the year rather than, I guess, a heavy reliance on development that the business is going to still realize on at the moment?

Yes. I think if you look at the guidance we've provided to '25, where we're calling out $0.36 for IDC, the goal is for the future to have to be more predictable, more reliable than an investment segment will be a key contributor to that. So that is exactly the premise of the strategy and what we've got to execute into the future.

Yes, that's right. So part of that is getting obviously 75% of our capital back into Australia, deploying 60% of our capital into investments, and we would expect that to generate over 50% of the Group's EBITDA, and a lot of that should be quite predictable from the start of the year. So that goes a long way to giving greater visibility on earnings and obviously increasing the earnings quality of the Group.

[Operator Instructions] The next question comes from David Pobucky from Macquarie Group.

Just following up on one of the last questions around the expected debt reduction of about $1 billion in FY '25. What further debt reduction are you looking at in FY '26 to get to within that 5% to 15% target range? How should we be thinking about that, please?

Yes. Thanks for the question, David. It's -- we've -- and we've called that out in the presentation, we thought that we reached peak production in FY '24 in terms of deploying capital off our own balance sheet into new development projects. We expect that to ease going forward. We've got certain capital recycling and coming back into the group. What we're really talking about now then is the allocation of that additional bucket of capital, the $1.7 billion, and we haven't given yet the market a lot of detail as to how that's going to be deployed with regard to paying down debt, returning capital to security holders or investing to future growth. Obviously, as we work through that bucket, we'll be able to come to market and give a little bit more color. But certainly, we believe that, that initial $1 billion of paying down debt from that [ $2.8 billion ] bucket plus anticipated cash flows that we're seeing gets us within that 5% to 15% range by the end of FY '26 without having to rely on significantly on capital being recycled from that $1.7 billion bucket and use specifically to pay down debt.

And just the second one for me. Maybe just your latest view on real estate markets. I mean, previously, I think this year, you mentioned that you were seeing encouraging signs, the property cycle is turning, but the outlook remains uncertain. Just curious to know how your latest thoughts and thinking has shifted since then?

Yes. I think if I look at the markets and internationally, I think when you look at the last 12 months, we've seen capital markets and deal activity dropped by some 50%. I think we've been monitoring Build to Rent/Multifamily in our international cities, and in particular, the U.S., and there's been some transactions that are starting to show some positive outcomes, which could see and they're more at the smaller end, but there have been some positive transactions, which have seen cap rates come in again a little bit as we see called out the long-term 10-year bond rate since our strategy announcement in May across both the U.S. and Australia, we've seen an 80 basis point drop in the 10-year bond rates for both of those 2 markets, so they bode well. When I've been talking to the brokers and the market where everyone feels that we've sort of hit that peak in terms of the trough -- peak or trough depending on how you look at the cycle. We're seeing still strong positive momentum in the luxury residential space and in residential in general. We're seeing low vacancies in that build-to-rent space across here in Australia and international markets. So I think that bodes well. I think leasing and the market around office, ultimately, we've seen really from our perspective, the premium products are more sustainable have performed better than the B2C and that trend continue throughout the last 12 months, and we see that trend continuing into the future.

Great. Good luck of the coming 12 months, guys.

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

Firstly, thank you for all joining and we'll close today's call.

Thank you.