Stockland (SGP.AX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Stockland's Strategy Update. My name is Tarun Gupta, Group CEO and Managing Director. Joining me today is Andrew Whitson, CEO, Communities; Tiernan O’Rourke, CFO; and joining us from Brisbane, Louise Mason, CEO of our Commercial Property business. I would like to start by acknowledging the traditional owners of the land on which we call you from today, the Gadigal people of the Eora Nation, and we pay our respects to their elders past, present and emerging. Stockland's purpose is we believe there is a better way to live. Our purpose has driven us since we were founded in 1952, and it is an integral part of our DNA. Our purpose energizes our people every day to build positive and lasting legacies by creating vibrant communities all over Australia. And as we move into the next decade of growth for the organization, our enduring purpose and our vision to be a leading creator and curator of connected communities will drive us into the future as our people strive to make a valuable contribution to all our stakeholders who work, live, shop and play in our communities. We have a powerful platform for growth. We have a clear purpose and values-driven culture and brand, and we have specialist end-to-end multi-sector capability that adds value in each stage of the real estate life cycle. As Australia's leading residential developer, we have an excellent track record of creating connected communities that we will leverage into other adjacent sectors. Our large land bank of 60 million square meters of land, equivalent to over 20 Sydney CBDs, our strong balance sheet and leading ESG track record position us well for the next phase of growth. Over the past 5 months, I have done my own diagnostic, and I have listened to and reflected on the feedback from many of our stakeholders, including our securityholders, our employees, our customers and other market participants. There is strong alignment between what I have heard and my own analysis on the opportunities to add further value for all stakeholders. We will focus on dynamic and decisive portfolio management to anticipate future risks and opportunities, so we can provide strong risk-adjusted outcomes from our diversified business model. We have strong capabilities. And as we embark on this new strategic direction, we must enhance our capabilities in origination, mixed-use execution and investment management. And as our business model evolves to partnering with third-party institutional capital, we will extend our fiduciary mindset and operating model to managing third-party capital at scale and to ensure we meet their needs and build strong alignment of interests. And we will make changes to substantially increase execution, speed and focus in implementing our strategic direction. So as you can see, the opportunities we have in front of us all revolve around our people capability. And as we get ready for execution, we have assembled a strong and refreshed leadership team, which I will touch on shortly. There are 4 major long-term trends and a number of core beliefs that provide the context for our strategy. First, we believe that the urbanization and urban renewal of our major cities will continue. We believe net overseas migration will resume as our borders open up, driving population growth and supporting long-term fundamentals for the real estate sector. Housing affordability will remain a significant challenge, and we will continue to play our part in providing affordable product in our communities. As our state and federal governments look to pay down the significant curve of debt and take initiatives to stimulate growth, we see more opportunities for the real estate sector to partner with governments in creating future jobs on government land. The second key trend is the exponential growth in institutional capital, which we expect to continue. As an asset creator, we are in a strong position with a distinctive advantage to partner with institutional capital and to create high-quality income-producing investment product. Third, we believe that digital acceleration will continue and will significantly shape the real estate sector going forward. We believe in the long-term growth in e-commerce and logistics and the continued shift towards nondiscretionary retail users. Our business is well positioned on both sides of the equation with our logistics and nondiscretionary retail portfolio. We believe that workplace will remain an important asset class, and the shift to hybrid and flexible working will require a more curated approach to workplace design and operations. Evolution towards connected homes and how we interact with our customers through omnichannel engagement will also permeate through everyday interactions with our customers. And importantly, we see the growing momentum on ESG underpinning our future and our differentiated market position in not only decarbonizing the real estate industry's footprint but in delivering the right balance between environmental, social and economic outcomes in everything we do. So now looking at our strategy going forward. I would like you to take away the following 3 things from today's presentation. We will dynamically reshape our portfolio. We will accelerate in our core business -- delivery in our core business, and our business model will evolve to partnering with third-party capital. Executing on these 3 strategic priorities will substantially improve the quality of our portfolio and will, in turn, drive sustainable long-term growth for our securityholders and other stakeholders. So let me take you through each of our strategic priorities. First, we will dynamically reshape our portfolio. We will extend our leadership in master planned communities to become Australia's leading residential developer, owner and manager. We will extend our footprint into adjacent sectors of land lease communities and apartments. We will increase our allocations to logistics and workplace sectors to access future high-quality recurring investment income. Our residential, logistics and workplace target capital allocations will lift from 50% today to over 70% over coming years. And we will be downweighting our capital allocations to the retail and retirement sectors from about 50% today to less than 30% of net funds employed. Secondly, we will accelerate delivery in our core business. We have a strong $33 billion development pipeline across our residential, logistics and workplace businesses. This pipeline is underpinned by land secured at attractive points in the cycle with high levels of planning certainty and solid embedded margins. Importantly, we're targeting the commencement of more than 80% of our $12 billion investment asset pipeline over the next 5 years. This will provide access to future high-quality investment income for both us and for our capital partners. Thirdly, we will substantially scale our capital partnerships. We are targeting at scale institutional capital partnerships in each of our sector businesses to improve return on our capital and to scale our platform. This access to third-party capital will provide funding for our growth by accelerating our development pipeline and will generate new sources of high-quality recurring management income. We are focused on creating a sustainable platform for long-term growth. We will continue our focus on creating high-quality income streams and maximizing our returns on a sustainable basis. We will maintain our long-term average 60% weighting to recurring rent and management income sources with development activity providing 40% of higher returning income, and we are introducing return on invested capital or ROIC discipline. We will be targeting 6% to 9% ROIC for recurring income activities and 14% to 18% ROIC for build-to-sell development activities. So looking at how we will reshape our portfolio more closely. Our ambition is to become Australia's leading residential developer, owner and manager. We will increase our residential weighting from 15% today to a targeted 20% to 35% of our portfolio. This will include our build-to-sell development activities. And more importantly, we will be allocating more capital to ownership recurring income through land lease communities, and we are also exploring build-to-rent. We will be building our pipeline into apartments over time to provide more diversity of product and ability to participate in mixed-use opportunities on our existing land bank and in new origination. We see our exposure in logistics and workplace increasing from 35% today towards the upper end of the 30% to 50% target allocation range. This will include focus on our logistics and workplace development pipeline and also new assets in life sciences, technology, education and health sectors. We will be downweighting our overweight position to retail and retirement from 50% today to less than 30% over the long term. We are in a strong position with a significant $33 billion development pipeline, which provides good visibility to create high-quality investment income from new generation assets and enhanced returns from development activity. Our $21 billion master planned communities pipeline comprises 75,000 lots. This was secured on average 10 years ago and has attractive embedded margins. Our $3 billion logistics pipeline includes major multi-stage opportunities such as Kemps Creek and Melbourne Business Park. Over $1.6 billion of this pipeline is in either active development or well progressed in planning. Our $6 billion workplace pipeline, which includes the $2 billion M_Park project with Stage 1 already under construction, the $2.7 billion Piccadilly project and the $1.2 billion Affinity Place project. We aim to have commenced construction of our entire workplace pipeline within the next 5 years in partnership with capital partners. In land lease communities, we have started production on our $3 billion development pipeline comprising 7,800 sites across 28 communities. In addition to this identified pipeline, we have commenced master planning on a number of other large-scale potential opportunities within the portfolio, including Yennora, Brooklyn, Triniti and St Leonards. We will build scale in our apartments business. In addition to the 300 apartments that we already control, we will be looking to secure new opportunities at what we believe is an attractive point in the cycle. We will be partnering with third-party capital to accelerate our development pipeline and scale up our platform and to improve operating leverage. We see opportunities to partner all the asset classes in which we operate. Our initial focus will be on large-scale partnerships with institutional capital on key sectors and thematics. We will typically target 25% to 50% co-ownerships to maintain material exposure to the new-generation high-quality assets that we will be creating. This will provide access to new investment income for us and will provide strong alignment of interest with our capital partners. This evolution of our business model will improve our return on invested capital, provide additional funding for our platform and generate new high-quality recurring management income. We have listed some of the opportunities on this slide, which we will be targeting over the coming years with discussions underway on some of the near-term opportunities. We will be leveraging digital technology and innovation in order to improve customer experience and maximize our returns. We already have some very tangible examples of how we are doing this. We pivoted strongly to digital sales during lockdowns. Over 90% of inquiries during this period were via our digital platforms, contributing to a 70% reduction in the average cost per inquiry. We did not just generate inquiries digitally. We completed the entire purchasing process virtually. Approximately $930 million of sales were entirely virtual during lockdown, from the initial inquiry through to the transfer of title. We recently launched Dreamcatcher, our proprietary online platform designed to help our customers visualize and style their homes early in the buying process. Since its launch in December 2020, we have hosted over 195,000 virtual sessions on Dreamcatcher. This has driven strong engagement with our customer spending on average of 58 minutes on the platform. Our ambition is to be a leader in providing end-to-end digital customer experiences in line with our sector strategies. ESG leadership is key to our strategy, our long-term performance and an important source of competitive advantage. This ensures our business remains future-focused and is crucial for Stockland to access capital, attract and retain talent and to deliver sustainable returns to our securityholders over the long term. We are proud of our strong track record in delivering superior environmental, social and economic outcomes. Since we were founded almost 70 years ago, our purpose, vision and values have been aligned in creating positive legacies in our communities. As an organization, we are truly committed to having a substantive positive impact on our society and our environment. We are accelerating our commitment to sustainable development and a carbon positive, green future. We have brought forward our Net Zero Carbon commitment by 2 years to 2028 and have made strong progress in recent years by reducing emissions intensity by 69% since 2006 across our Commercial Property portfolio. 28% of our total electricity usage comes from rooftop solar. So as you can see, we will be making some material changes to our portfolio mix, expanding our reach in areas in which we have a competitive advantage and maximizing our return on capital while maintaining -- while remaining focused on the quality of portfolio and our income streams. I will now hand over to Andrew to take you through how we will reshape and grow our residential business in line with our strategy.

Thanks, Tarun, and good morning, everybody. As outlined by Tarun, our vision for the Communities business is to become the clear market leader in the residential sector. To achieve this, we will leverage our competitive advantage in master planned communities to broaden our market reach into adjacent residential sectors with a focus on generating high-quality recurring income. This will involve 4 key strategic moves. The first is maintaining our leadership position in master planned communities, where we have a unique competitive advantage. The second, growing our land lease communities business through expanding the pipeline on our existing land bank and further new acquisitions. The third, taking advantage of the cycle to build a sustainable apartments business. And the fourth, executing on a capital solution to downweight our exposure to retirement living and reinvest into other high-returning parts of our business. Our starting position is a strong one. We are the clear leader in the master planned communities sector, which is built on a unique combination of 3 elements: our brand, which is built on the quality of the communities that we've created; our scale, which enables us to have a deep understanding of what our customers want and deliver this at a lower price; and our 75,000 lot land bank has an average age of 9 years with strong embedded margins. This, together with the market tailwinds, positions us to continue to deliver attractive returns from this business. Our master planned communities business also provides us with a strong platform to leverage into other forms of residential development. We have deep capabilities in site acquisitions, customer insights, design, delivery and marketing. We've demonstrated our ability to expand into adjacent sectors with a successful ramp-up of our townhome product, where we settled around 500 dwellings last year. Our extensive land bank also provides significant opportunities in alternate uses. We're already leveraging our leadership in master planned communities to rapidly scale our land lease communities business. We find this sector particularly attractive because of the demographic tailwinds, the compelling and simple customer proposition and the high-quality recurring income, which is generated. From a standing start under 2 years ago, we've built a portfolio of over 7,800 sites with the potential to -- for further growth from our existing land bank, now that we have the capability to create larger communities following the acquisition of Halcyon. We also have a competitive advantage in acquiring new greenfield sites, being the only business that has the capability to acquire larger sites and deliver both the traditional residential product plus create a land lease community. As we scale this business, we will consider opportunities to introduce third-party capital to fund the growth and further strengthen returns. Given the underperformance of the apartments sector relative to the established housing market since the onset of COVID, we believe now is the right time in the cycle to establish a sustainable build-to-sell apartments business. This move is underpinned by a core belief in urbanization. To ensure that we have senior capability to execute on this strategy, we've recently appointed Ben Christie to lead our apartments business. Ben has a proven track record having delivered more than 7,000 apartments across Australia over the past decade. This new business will also benefit from leveraging our significant investment in digital platforms that generate deep customer insights and drive sales and marketing efficiencies, as Tarun referenced earlier. We're also exploring build-to-rent as another opportunity to generate residential recurring income. We believe that housing affordability and changing housing preferences of millennials will significantly accelerate the growth of build-to-rent in Australia over the next 5 years, providing the opportunity to generate attractive risk-adjusted returns under a capital-light model. So in summary, our competitive advantage in master planned communities positions us strongly to extend into adjacent residential sectors, including land lease communities and apartments, with a focus on generating high-quality recurring income and opportunities to introduce third-party capital across the platform. I'll now hand over to Louise Mason.

Thanks, Andrew, and good morning. The key priorities in commercial property are the acceleration of the areas we've been focused on for the last couple of years with the reweighting of the portfolio and capital partnering on several key opportunities. I've spoken to you at recent updates about our $9 billion-plus pipeline in workplace and logistics. That pipeline is on sites we bought over time, and the delivery will broaden our capital allocation in workplace and logistics from 35% today to a range between 30% to 50%. In Retail Town Centres, the core portfolio has been repositioned over the last few years towards the essentials categories, resulting in above benchmark productivity and sustainable occupancy costs. More than 75% of sales across the core assets comes from the essentials categories. We will also accelerate the disposal of the remaining noncore assets. This is underway with us exchanging a contract for the sale of Cairns last Friday at book value with settlement forecast to occur in Q3 FY '22. We're seeing increased investor appetite for these town center assets, particularly the neighborhood and smaller subregional assets. Our focus on and exposure to these assets will grow as we further develop town centers across our master planned communities, and we'll explore capital partnership opportunities for these town centers at the appropriate time. Across all the commercial property assets, we'll continue to assess the highest and best use of the sites, exploring alternate uses and densification to ensure we maximize the value of our assets. We see further upside across our retail and logistics land bank over time. Going forward, you'll see clear definition when we talk about workplace and logistics. Logistics will be pure industrial and logistics assets, while workplace encompasses CBD and suburban buildings, life sciences, technology, health and education. We have a strong belief in the logistics sector, particularly underpinned by the continuing growth in e-commerce and Australia's supply chain configuration. We forecast sustained investor demand with record low cap rates. And as you can see from the chart bottom left, Western Sydney land values have more than doubled over the last 3 to 4 years. We've grown our logistics portfolio by over 90% since 2016. We've acquired well over the last 5 years, building both a strong, well-located land bank and well-leased assets and will accelerate our $3 billion plus development pipeline. We're also exploring capital partners to undertake additional large-scale development opportunities, which will deliver third-party management income and a competitive cost of capital. We believe there will be strong fundamental demand for office space long term, driven by white-collar jobs growth, whilst recognizing that the hybrid working model will continue with people working remotely part of the week. Our development pipeline is not constrained by older assets requiring repositioning. Our development rollout is ideally positioned time frame-wise to create the workplace of the future focused on flexibility and collaborative workspaces with a high degree of amenity, the curation of spaces and a focus on well-being and sustainability. We'll look at our capital allocation based on market conditions with workplace investment focused on CBD and strong suburban locations, and we'll leverage our strong relationships and well-positioned sites for life sciences and technology to grow these subsectors. We're now exploring a programmatic capital partnership opportunity with investors for the $2 billion plus M_Park project. Affinity Place and Piccadilly are proceeding well to authority approvals and will be capital partnering opportunities in the future. As we've seen with recent market transactions, there is growing investor appetite for both essentials goods and services-based retail assets and assets which can be densified with mixed use over time. Our portfolio is well positioned in essentials with repositioning over recent years delivering resilience both during and post-COVID lockdowns. The retail assets are now performing well above sales productivity benchmarks at $9,799 a square meter and with an average sustainable occupancy cost of 14.9%. The strategy targets 20% to 30% exposure to retail, down from today's 41%. And we aim to achieve this with the acceleration of the divestment of the small number of remaining noncore assets such as Cairns, the exploration of capital partnerships on our essentials portfolio and the master planning across the core larger assets to ensure further remixing and mixed-use opportunities are explored. So to summarize, Commercial Property under the strategy aims to deliver 30% to 50% capital allocation to workplace and logistics, creating and capital partnering larger developments whilst delivering recurring income logistics assets and downweighting retail to 20% to 30% of the capital allocation whilst retaining management over our well-placed essentials retail assets. I'll now hand back to Tarun.

Thanks, Louise. So our strategy will be anchored in strong financial discipline and a disciplined approach to capital allocation. As I have highlighted, we are substantially changing our target sector allocations, increasing our exposure to residential logistics and workplace while downweighting our exposure to retirement and retail. We will maintain a strong bias towards high-quality recurring sources of income with a target capital allocation to recurring income activities of 70% to 80% and 20% to 30% for development activity. Consistent with our recent high-quality income mix, we will be targeting a long-term average income of 60% recurring and 40% from development income. And we are introducing ROIC discipline across the group. We are starting from a position of financial strength, and we will maintain our conservative 20% to 30% target gearing range. Third-party will play a significant role in providing additional sources of capital, improving our returns as well as generating annuity-style management fee income. In instances where we have off-balance sheet debt and capital partnerships, we will limit look-through gearing to less than 35%. We also have diversified sources of capital and strong relationships with debt investors globally, and we will continue our focus on maintaining our high investment-grade credit ratings. And importantly, we will continue our focus on delivering consistently strong operating cash flows. As we generate new development earnings and management fees in capital partnerships, we will ensure strong discipline in recognizing cash-backed profits. We are also retaining our policy of distributing 75% to 85% of FFO. We would be farewelling Tiernan at the end of this month, and I would like to thank him for his contributions to Stockland over the past 8 years. I will now hand over to him to provide some further details on our financial strategy.

Thanks, Tarun, especially for those nice words, and good morning. I have to say that helping to finalize a new strategy over the last few months has been a fantastic way to finish off an amazing 8 years with the Stockland Group. It's been an absolute pleasure and privilege to serve securityholders in that time and to be a senior leader in what is a truly great company. It has been really important to me during the strategy process to share my knowledge of the last 8 years with Tarun and the team, who will take the good things of the past and build on them together with all these new initiatives as the company moves forward. I know Alison Harrop from the Property Council's CFO roundtable, and she will be a great successor. With that small indulgence, let me move to target capital allocation. What I think is important to talk about here is what will change and what will stay the same. In keeping with the strategic priority of dynamically reshaping our portfolio, the capital allocations in the business will evolve from where they are today, as Tarun has already outlined. And while I won't repeat the numbers in driving this strategy forward and achieving these allocations, we will maintain discipline around the level of gearing, strong operating cash flows, liquidity and having a strong balance sheet which supports the business, things you know we have consistently delivered in the past and will continue to focus on in the future. Together with this financial discipline, this strategy will result in 70% to 80% of our capital generating stable recurring income with diversification of risks through the use of investment partnerships, management fee generation and develop to own inventories. Moving to target income mix. Our income mix will follow our capital allocation in that our long-term average recurring income will be about the same as today, circa 60% from reliable, well-diversified and low-risk sources. This recurring income will include both management fee income from quality partners and existing high-quality rental income. And our high velocity of cash will be sustained in build-to-sell development activities. We expect our partnership activities will be recorded in equity accounted joint ventures on the balance sheet with Stockland's share of income recorded in FFO and distributions recorded in our operating cash flow. Finally, moving to financial discipline. Our existing target gearing range of 20% to 30% for on-balance sheet activities remains the right setting for us going forward and provides an appropriate balance between risk and reward. As you know, Stockland has consistently operated within this target range. And we will continue our focus on delivering high velocity operating cash flows and active capital recycling program and the maintenance of significant surplus liquidity from debt capital markets. As Tarun noted on the last -- his first slide here, the use of our -- of any leverage in capital partnership vehicles would be reported using a new look-through gearing metric in conjunction in with our normal gearing metric with a maximum exposure of 35%. We believe it will be well supported by our debt investors in delivering this part of the strategy. Importantly, recurring income from partnership profits will be cash backed. This also means we won't be recognizing in FFO any uplift in capital value on the retained portion of projects, and fees and profits of capital partnerships will align closely with project cash flows. Finally, we will retain our target payout ratio of 75% to 85% of FFO, and we expect the components of this strategy will allow us to operate within this range as we transition into these new capital allocations. With that, I'll hand back to Tarun.

So thanks, Tiernan. So our focus has already shifted to execution. We will implement the strategy over multiple years, and we have set clear priorities over 3 time frames: Reshaping the portfolio over the short term, optimizing our portfolio and accelerating delivery in our core business in the medium term and driving long-term sustainable growth for our securityholders and our stakeholders. Our near-term priorities include: extending our residential leadership by expanding our land lease communities business and putting in place the foundations for growth of our apartments business; accelerating the workplace and logistics pipeline in order to create new high-quality income streams; reducing our exposure to retirement and retail sectors by exploring capital solutions; and further building our people capability in the investment management, origination and development pipeline delivery. So to start executing at pace, we have already made some solid inroads into building out our people capabilities in several key areas. At the senior management level, we welcome Justin Louis as our new Chief Investment Officer last week. We also look forward to welcoming Alison Harrop as our new Chief Financial Officer early in the new year. We have also added significant capability in the areas of apartments, retirement living and mixed-use with the appointments of Ben Christie to head up apartments; Clem Salwin as Head of Retirement Living; and Jeheon Son as General Manager, Mixed Use. We have also made a number of key internal appointments as highlighted in this slide, promoting many of our most capable people to the newly created role of Executive General Manager. This new structure provides the opportunity for both Andrew and Louise to lift their focus and to work closely with me in executing our strategy. We have a great depth of talent and capability in sourcing, structuring, creating and managing high-quality real estate assets across our targeted sectors. And the people shown on this slide will all be playing a key role in executing our strategy. So in summary, our strategy will play to our strengths. It will leverage our deep capabilities and unlock the upside embedded throughout our portfolio. We will reshape our business towards more attractive sectors that are supported by long-term trends. We will focus on our core and build on existing strengths and capabilities in residential, logistics and workplace. We will target third-party capital to create new recurring income streams and drive a higher return on capital. We will maintain a rigorous focus on execution, and we will deliver our strategy while maintaining a strong financial position and a high degree of capital discipline. We believe this strategy will substantially improve the quality of our portfolio, which in turn will drive sustainable long-term growth for our securityholders and other stakeholders. We will now open up for Q&A. This will be an operator-moderated session. Operator, over to you.

[Operator Instructions] Our first question comes from Tom Bodor from UBS.

Thanks for the update. My first question is around the 6% to 9% target -- return target for the passive assets, and I note that there's revaluations included in that 6% to 9%. And I'm just wondering what level of long-term revaluations do you assume contributing to the returns for Commercial Property?

Yes. Tom, thanks for the question. So yes, it's 6% to 9%, as you pointed out. This is a statutory EBIT number at the segment level for recurring income. So it does include the income return we'll derive, any management fees in that category, but also revaluation gains over time. In terms of our assumptions, we just assume steady income growth in line with long-term trends. We don't particularly forecast cap rate movements in that. So it's a steady outlook. Clearly, we'll be managing our portfolio dynamically to anticipate those sorts of movements, but that's the assumption. It's a statutory income plus capital total return.

Okay. That is clear. And then in terms of your comments around exploring entry into the build-to-rent sector, I'd just be interested in your assessment of what your return hurdle might be or how you would think about returns in that sector. And I think you also mentioned you'd look to do it in a capital-light way. So would having a capital partner there be a precondition to entering the build-to-rent sector?

Yes. Tom, as we've said, we are doing some work in exploring the build-to-rent sector. I think if you look at the broad thematics, the millennials being now the largest part of the population, housing affordability cap rates in this sector are more closely aligned with other sectors. They are all instances which are supporting the outlook for the sector. As we pointed out, we're still exploring. So in terms of returns, we are not at that level to be articulating except to say, obviously, we'll be looking to generate accretive returns based on our cost of capital, which will -- it is a capital-intensive sector. Each of these buildings is worth hundreds of millions of dollars. So it will rely on us partnering with third-party capital, but we'll do that over time. And we'll keep you posted as our strategy evolves in this space. We're still exploring it.

Okay. And then a final question, if I may, is just around sort of, obviously, it's a long-term strategy to redeploy capital. But I'd just be interested in if you think you can do this while still delivering FFO growth over the next few years.

Yes, Tom. So the strategy clearly articulates our desire to reposition the portfolio in line with long-term trends. So we have a more resilient portfolio that has a higher return on capital under the business model we are articulating, and we have conviction that, that's where the portfolio will be heading. As is the case, as we reshape the portfolio, there'll be -- as we do transactions, sell assets, buy assets, there'll be movements, both up and down, and we'll be managing that very thoughtfully. But the long-term trajectory of improving the quality of our business and the returns on the capital that our securityholders have given us, we have strong conviction that, that's where we're moving our portfolio.

Our next question comes from Lauren Berry from Morgan Stanley.

Tarun and team, just a question on your ROIC target for development. You're targeting 14% to 18%, but it does look like your previous ability for the business to deliver is a bit above that. So just wondering why the target is lower than what you have been delivering.

Yes. Lauren, thanks for the question. Yes, as you pointed out, we have been delivering at the upper end or slightly above the top end of the target. This is a long-term target in terms of how we set the hurdle rates for our business and how we think the returns from our build-to-sell development activity will be coming through. I want to confirm today that the underlying hurdle rates in our communities business and build-to-sell businesses haven't changed. So we're still targeting, and I'll get Andrew to comment on that shortly. We haven't changed those. This is really reflecting the range in which we think longer term, the business operates through the cycle. And clearly, at some points, when -- its favorable conditions will be at the upper end. And other times, we might be at the midpoint or within the range. So that's how we articulate it. Clearly, we've had a good run, and we're continuing to see good conditions. But Andrew, you want to just build on that answer?

Yes. Thanks, Lauren. With regards to the hurdle rates, we're still looking at around 15% hurdle rates for both master planned communities and apartments. We're seeing opportunities in that range. As Tarun said, when in strong market conditions, we'll trade above that ROIC target, and we have for the last couple of years. But that's how we'll be managing our portfolio when we're looking at acquisitions, when we're looking at deploying capital on a blended basis within that 14% to 18% range over the long term.

Okay. And Tarun, are you able to just comment on the cost outlook for the business? Obviously, you've added quite a few new positions, and then you've also flagged that you're going to be looking to build more abilities in the investment management space and development. How should we think about what this is going to do to costs over the next couple of years?

Yes. We're very conscious of making sure we have sustainable growth of the business. The recent appointments we've made, that's all within the guidance range that we've confirmed today. So it's fully funded and costed. Longer term, we will be building capability in some new areas like investment management, apartments delivery and some of the mixed-use delivery. But that will be really based on origination and actually conversion of opportunities because we've got enough capability to progress capital partnerships and those initiatives in the short to medium term. And then we'll be looking on the back of origination and growth to fund that incremental cost. I think, Lauren, what I should point out is we are substantially pointing to scaling of the platform using third-party capital. As you know, 97% of Stockland's current assets under management are internal balance sheet assets. As that starts to scale up with third-party capital, we are anticipating we'll get better operating leverage because a lot of our fixed costs can be then spread across a larger platform and, of course, generating management fees. So that's how we think about it, but we'll be very disciplined in terms of making sure the right returns are coming through our business as we evolve the strategy.

Okay. And then just a final one for me, just on funding the pipeline. Obviously, this is a very large pipeline you've highlighted. You want to start 80% of $12 billion of development for the next 5 years. So that's a lot of funding to do. I understand you're getting help from capital partners through this. But do you think you're going to be able to fund this pipeline purely from the divestments you flagged today and keeping the payout ratio at the current setting?

Yes, Lauren. As we look out on current targets and how we see the business evolving, we think we are very well funded. Firstly, our balance sheet is in very good shape. We've got gearing at the low point of our target range. We have flagged divestments or downweighting on the 2 sectors, which will provide additional capital to reinvest into our development pipeline. And then the third very important plank that we are highlighting today is capital partnerships because especially in the $9 billion workplace and logistics portfolio, we're sitting on some really high-quality pipeline that is -- we are very confident it's very attractive to capital partners. So there will be the 3 sources: our balance sheet capacity, the recycling of capital from the downweighting of sectors to the new growth sectors and then third-party capital. And on that basis, we feel confident on maintaining our distribution payout ratios because we think we have enough liquidity coming through the business model to deliver on this strategy.

So over a 5-year view, where do you see the gearing range ending up? Will it still be at the low end? Or are we going to track closer towards the top end of that target range?

I think, Lauren, in fair assumption, within the range, the midpoint is probably a fair assumption. We will -- as we've highlighted, depending on capital partners' appetite and their preferences, some capital partners no -- want no underlying debt in partnerships, other can have up to 50%. So we'll be using our balance sheet debt, but that will be nonrecourse and secured with the assets in those partnerships. So -- but the headline headstock gearing, we are forecasting to run well within the 20% to 30% target gearing range.

Our next question comes from Stuart McLean from Macquarie.

First question is just on the timing of these divestments. Do you have any color there? And I'm just thinking about the matching of divestments with the deployment into the development, please.

Yes. Stuart, thanks for the question. Yes, I think as I've highlighted in the presentation, the more near-term opportunities, and again, I don't want to put an exact time line, near term over the next 12 to 24 months is a fair assumption, the sorts of opportunities that we're working on is clearly partnership on M_Park. It's 60% pre-let with great programmatic opportunities in future buildings. And it's in production. So again, over time, we're funding it on balance sheet at the moment. That could be an opportunity. We have flagged, clearly, retirement living as a capital solution. We'll be looking to progress that. The portfolio is in great shape. And with Clem Salwin coming in, it's got a refreshed strategy. And we believe with the current strong resi market as well, it's a good time to be starting to explore opportunities in that. And then as we've shown already in retail, we've been successful in the first half. Now Bundaberg and Cairns, we're announcing today. But also, we believe essentials portfolio, as Louise said, is very strongly positioned and is a strong thematic that we'll be exploring. So again, that could be an opportunity. I think that's -- and yes, I was forgetting one more. And the other one which we've highlighted is land lease communities. We have a big pipeline that is starting to take shape. And as that's being delivered, again, a very attractive sector for institutional capital. That will be another area that we'll explore. Again, I think the right way to think about it is over the next short term, 12- to 24-month time frame. But we are progressing discussions.

Okay. Great. So it sounds like it could be up to, down at the exact maths here, but maybe a couple of billion dollars' worth of divestments over the next 24 months. Looking at the development pipeline in commercial, it doesn't seem like there's that size of developments coming on, particularly if you're selling down M_Park. So it sounds like -- is it fair that net funds employed in the recurring side of the business is going to decline? Is that the right way to think about that over the next 24 months?

Again, exactly the portfolio moves we'll be making in line with market conditions. So you may see some transition happening, but our focus is on maintaining those long-term targets that we put out in terms of allocation between recurring and the development side of the business, Stuart. And I think what -- you should also assume that we won't be standing still in terms of any new origination. We have Justin Louis joined us, and we've pointed to more building up of origination capability. And selectively, we will target, again, potentially with capital partners, new origination to continue to make sure we have the right balance between recurring and development income in line with our targets. So we're very focused on the targets that we've put out.

My final question is, as you look to sell these assets in retail and retirement and you're also bringing capital partners into an M_Park, which will result in cash backs of development profits, but we're going to see a skew away from that 60-40 split in development to recurring earnings at least in the near term and are going to have more development earnings in the near term.

Again, Stuart, it just depends on each of the moves. I think as I've already said, we're very focused, on average, maintaining that 60 to 40 mixture. But points in time, every 6 months, you may see movements, up and down on that range, but that remains the way we're going to be running the business. And as you've also -- you should have noted, we are planning to keep a large proportion, up to 50%, of the recurring income assets, enhanced by more management income on top, which will be recurring income. So that does continue to replenish our recurring income as we start to deliver our pipeline. Our logistics pipeline, which Louise touched on, a lot of that is ready for scaling up. It's got good embedded margins, and most of that we'll be keeping for the balance sheet. Our ambition is in logistics or new origination to look at capital partners. But most of what's on balance sheet, we're very attracted to keep over the short to medium term.

Our next question comes from Richard Jones from JPMorgan.

Tarun, just in terms of apartments, it's been a business that Stockland's kind of been in and out of for 15 years. It's never been able to really make it work. I guess why do you think it's going to be different this time?

Richard, thanks for the question. I think there's a few things here. We -- firstly, we think it's the right point in the cycle, which is an important factor for any real estate sector. We think the outlook will improve, given eventual opening up of borders and more population growth. Those buyers are initially more attracted to the apartments sector. We -- sorry, there's some technical issues. So that's the first point. The second point is we're building capability. We've hired Ben Christie, someone I've worked with for 10 years, one of the leaders in apartments delivery, delivered 7,000 apartments. And under Ben, we'll be building the capability. I'll get again Andrew to comment on the apartments strategy shortly. And I think what's not well understood is that Stockland is -- has already very strong capability in project management and delivery. We've got over 120 people already in our business delivering on our pipeline of projects, and we'll be embellishing that. And again, I think given all that, plus our mixed-use opportunities in our existing portfolio, which we've highlighted, together with the right point in the cycle, we're confident over the medium to long term, we will be able to build a sustainable business. So Andrew, you want to just build on that?

Yes. Thanks, Tarun. Richard, just a couple of things I'd add and reinforce. So obviously, timing in the cycle is really important. And as Tarun said, we think now is a good time in the cycle. What are we seeing? Yes, the relativity between the established housing market and apartments has really widened over the past 24 months, with apartments underperforming during that period. We've seen commencements drop right off. So we think now is a good time to enter that market. The second point, and it's around this theme of urbanization, we think there's going to be a number of opportunities within precincts, urban development precincts coming to the market over the next period. So we think there'll be some good opportunities to acquire. And in that precincts space, the market is not that deep for competitors. So we think there's some good opportunities there. And then just reinforcing the capability. We've got some good internal capability, but bringing Ben in gives us some real senior leadership for someone who's got a proven track record of building and delivering within the apartments space. So we think that positions us well to build a sustainable apartments business over time. But we'll be very disciplined in the way that we do it. As we ramp up and particularly with the overhead piece, we'll bring them on progressively, and we're approaching it like a real start-up opportunity.

Okay. And just in terms of the capital allocation to residential, you're saying it's going from 15% to 20% to 35%, so a real wide range. Should we assume that MPC capital allocation remains reasonably constant and it's land lease, it's apartments and build-to-rent potentially that are the growth drivers?

Yes. Richard, I think, yes, we had 15% resi. At the moment, we're saying 20% to 35%. I think in the initial yields -- years, we'll probably be operating at the lower end of that target. In terms of thinking about it, we've highlighted we'll be incrementally allocating capital into land lease, potentially in partnership with capital partners. But we have already a $3 billion pipeline. So it's a big pipeline, and it will grow from here because we're still out originating new sites. Apartments, again, depending on how it ramps up over the next few years. We'll get more capital allocation. And at the right time, when we enter build-to-rent, that's, as you know, a capital-intensive sector. So that's how it will be going. In terms of MPC, we believe we have the right overall net funds employed, but it will fluctuate within that range because we're generating very good returns on the NFEs we already have in the business and the margins. Again, Andrew, you want to build on that, anything else?

No. I think that's covered it. The -- and the range that you mentioned, Richard, obviously, we recognize that there's a cycle as well. So there will be times in the cycle where we think there'll be better buying opportunities, and you'd likely see us go up in that range. And then there'll be other times in the cycle where we'll pause. So that's really reflective of the 20% to 35% range for residential.

Okay. One final question. Just in terms of the through-the-cycle FFO growth, is there a number you're willing to put out there at the moment, Tarun?

Yes. Richard, we've given -- what we haven't given before is some ROIC targets and very clear capital employed numbers, which should help you to build out the long-term not just FFO trajectories but also return on invested capital. So I think that's the extra targets and the extra color we're providing. But in terms of specifics, clearly, we give out annual guidance. We'll be giving out FY '23 guidance closer to the start of the financial year. So I think with that, together with our ROIC and capital employed targets that we've now put out, there's quite enhanced capability to forecast the trajectory of the business. And we've got much clearer capital allocation ranges as well across our businesses.

The next question comes from Adrian Dark from Citi.

Tarun and team, looking at the development pipeline slide, I think Slide 10, could you talk through the yields that you would anticipate on the logistics and workplace pipeline, please?

Louise, do you want to take that question?

Sure. Thanks, Adrian. We've done well, I think, in this space over time. In terms of logistics, we've been sort of between 7% and 9%. Workplace, we'll be targeting about the same. So I think that's where, with the projects that we have in the pipeline, we'll probably be sitting. In some cases, in logistics, we've done even a bit better than that.

Louise, just to -- that was, I think, IRRs you're quoting. In terms of yield on cost ranges, do you want to just touch on that?

Sure. So yes, we're -- again, we've sat sort of well in that space. And in logistics, we're probably sitting in the upper range there that we've been talking about in terms of returns. Workplace, at the lower end of that range.

Sorry, can I just check what the yield on cost figure was for the 2, please?

Yes. So yield on cost in terms of logistics, we've been looking at sort of 6 to 7s and around that range in workplace as well.

Okay. And if I understand the slide correctly, it doesn't look like there's anything in the pipeline for retail. I guess I'm wondering whether we should be...

Small things there. Yes. So it's more the master planned community town centers that we look at in retail, so no major developments across the current pipeline. As I said, on our larger retail assets, we'll be master planning and looking at the densification and mixed-use opportunities. But in relation to large rollouts of developments, not forecasting that in retail. But you will see opportunities like town centers at Aura and Cloverton and some of the other master planned communities roll out over time. And they're more in that essentials categories type mix.

Again, this will change as we originate new MPC projects. But there's circa $300 million to $500 million sort of range over the next 5 years already in the pipeline.

Okay. And then just 2 more, if I may, please. On residential, should we be anticipating that master planned community volumes will be above the previous through-the-cycle target going forward? Or can you make any comments about community volumes more broadly?

Yes. Thanks, Adrian. The -- obviously, where we're trading at the moment, we're seeing strong market momentum. We've sold 7,700 over the last 12 months. So it positions us strongly to deliver elevated level of settlements over the short term. The way that we're thinking about it over the longer term is really looking at the ROIC within the portfolio is the way that we'll be managing it as opposed to targeting specific settlement volumes. So achieving that ROIC target on a portfolio basis, thinking about all of the residential sectors is how we'll be thinking about returns and managing our portfolio through the cycle.

Okay. And just one final question. Tarun, can I just check in terms of the revaluation component that would be assumed in the ROIC target? I think in the accounts, that's likely to be around 2% to 3% assumed in book value. So would that be a reasonable figure to assume?

Yes. I think, Adrian, at a high level, yes, I think that sort of income growth assumption's a fair range. I think, as we've highlighted, again, just for clarity, on development JVs, if we do them, we'll only be booking FFO in the cash-backed components of sell-down to capital partners. On our component, any revaluations will go through, obviously, in the stat NTA and the stat profit. So that will be included together with the 2% to 3% income growth. So you've got to take account of both those things as the strategy evolves. Obviously, we're at the start of it currently.

Our next question comes from Sholto Maconochie from Jefferies.

Congrats on changing your providers for the conference call because it's working quite well. Just on the ROIC target, can you just confirm a couple of things? The 6% to 9% range, when you book the development profits to NTA for your share, that would be in the ROIC for development, correct?

Yes. No, I think that will be in the recurring part because we'll be holding on to our share for the long term. So any development NTA uplift will be in the recurring part because our intention would be to hold those assets for the long term.

Okay. And then just on the ROIC, if you look historically, your retirement's been pretty sub-5% ROA. I know you're moving to ROIC, but similar concept, it was 5.4%. And your average was sort of 5% in '17 to '20. How much of that new target of 6% to 9% is just from divesting retirement and some of that retail versus the growth in development? Can you sort of talk to how the maths works on that? Is it sort of 50-50? Or is that why you're getting those returns? Because the reval -- the cap rate cycle is probably largely done. So I'm just trying to work out how to get there.

Yes. It's not -- that's probably not how we've thought about it. I think we are looking at the activity, our recurring income activity. So you've got your normal cap rate plus -- cap rate being the income return, plus your 2% to 3% growth. We are assuming over the long term, we will be getting management fees coming through, investment management and other fees that come through. Obviously, they're high margins as the portfolio builds up. So that will enhance the ROIC. And as we book redevelopment NTA uplifts in the ROIC on our retained proportion, it's the mix of all those. And clearly, at a portfolio level, if we're successful in downweighting our retirement, which is a lower return on assets business, you will see just the overall portfolio returns improve if we can redeploy, which we're very confident on, redeploying that capital into higher growth and better returning asset classes.

Yes. That makes sense, a combination of all that. And then just on the capital partnering for, I think you said near-term, M_Park and RL. When do you expect that to sort of -- is it within next -- within 12 months, given retirement has been talked about for 5 years?

Yes. I think it's -- Sholto, I've given you the time frame, next couple of years. These are big portfolio moves, and we're trying to do them. We have conviction that the conditions are right. But as you know, deals take a long time in selling down operating business components and mixing the portfolio. So I don't want to get into exactly which month and which quarter, but we are very focused on it. And we've got interest, as I said, preliminary interest in terms of the conviction we have on the strength of the opportunities we're pursuing.

And then maybe for Louise. In relation -- you've sold down Cairns. I think $146 million was the book value last time from memory. Was -- what -- how many more retail asset sales do you see as noncore? And excluding essentials JV but sort of the whole 100% assets, how much dollar value do you sort of see as noncore?

Yes. I think as I've said at the full year, there have been 2 to 3 noncore assets. We were still holding Cairns as one of those. We've got a couple of other smaller assets. So there might be another, in total, around $300 million. But as you said, Cairns is about $146 million of that. But we've always got to keep assessing these assets over time. So I will always talk to you about core and noncore. But at the moment, there's only a couple of more smaller assets in that basket.

It was up to $300 million, okay. And then just finally, on the -- when you look at -- you talked about mixed use. How much of your larger retail book has a mixed-use component? Or do you -- as a percentage do you think could be -- have a mixed use or higher and better use or some form of mixed use?

So Sholto, I'll take that one and we'll -- if we can wrap up your questions, we'll go to others and then come back to you. But just in terms of our embedded opportunities, we're doing, as Louise said and Andrew as well, we've commenced master planning on a number of sites. And I think over the coming periods, we'll articulate exactly what sort of mix and opportunities we see. It is on our -- some of it is on our larger retail sites. It's also on our logistics land bank. Some of the positions we've highlighted, Yennora, some of our office positions like St Leonards, Triniti and also in our master planned communities, we believe there are sites and opportunities. It's just we're not quite ready for the detailed at the moment, except to say we have -- we believe that over time, that will throw up quite attractive opportunities because obviously, we've already paid and control the land there. So -- but specifically, it's too early to give you that number, Sholto.

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

Just wanted to confirm 2 things you said on the call. Firstly, just on the logistics pipeline, your intention is to basically keep that on balance sheet at the present and not partner that?

Yes. I think we'll -- again, at our current intention, given what's ramping up and we have capacity to fund it, they're sitting on good returns. So that's where we focused in the short term. Longer term, we'll again assess our position. We are -- we have highlighted and we have opportunity to partner with third-party capital on new origination. We still believe develop-to-own, particularly develop-to-own using our integrated model, still provides good opportunities to build out our portfolio. And that's where our focus would be. But a lot of the current pipeline, we have capacity to fund ourselves. And we have a need for good, high-quality recurring income, especially as we downweight some of the other sectors. So that's our current intention.

That's clear. And then just on -- sort of talk about the partnerships and sort of funds management of business that you want to build. Can you just provide a little bit of a feel about how you're thinking about the structures for that business?

Yes. Yes, James, I think clearly, it's -- we are at a start -- more or less, a start here at Stockland. And as I've said, our initial focus is really on the larger scale opportunities in direct partnerships on preferably programmatic deals, programmatic being that it's not just one building, that it's a series of buildings or a series of assets that we're partnering with our capital partners. They're the style of things we're thinking about as we start to build our platform, very high levels of alignment, 25%, 50% co-ownership. Obviously, we'll provide the services to the capital partner. That's how we're thinking about starting to scale up our platform. And then as that grows over time, our capital partners will have more direct opportunities to give us mandates for certain thematics and certain core or value-add or opportunistic strategies. We'll explore them over time, but the initial focus is on the things I mentioned. The M_Park sort of programmatic opportunity, land lease programmatic, retirement living and essentials retail, they are the sort of large-scale direct partnerships, which is what capital is really attracted to because they know we have the end-to-end capabilities, high alignment of interest and some very strong thematics that we're talking to partners about. So that's how you should see the next -- at least the next couple of years evolving. Again, on the back of that, we'll build other opportunities.

Thank you. We have no further questions. Tarun, I'll hand it back to you.

Okay. Well, that's great. Again, we are commencing a bit of a road show to talk to all our -- many of our investors and also participating in a couple of conferences next week. So there'll be lots more opportunities for our securityholders and analysts to ask us many more questions. But thank you again for joining in. As I said, we have a very clear strategy with some key priorities, and we're getting ready for execution with what I believe is one of the best teams -- property teams in the market. So thanks for joining, and we'll say goodbye here.