Stockland (SGP.AX) Earnings Call Transcript & Summary

Good morning. My name is Tarun Gupta, CEO and Managing Director. Welcome to Stockland's interim financial results update for first half 2022. Before we begin, I would like to start by acknowledging the traditional owners of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging. Joining me today is Alison Harrop, our CFO; Louise Mason, CEO of Commercial Property; and Andrew Whitson, CEO of our Communities business. This year, Stockland celebrates its 70th anniversary since it was founded in 1952. We are motivated as ever to build on our strong legacy and are driven by a purpose, there is a better way to live. Our people are passionate about creating connected and curated communities for thousands of Australians to live, work, shop and play. We delivered a solid operational and financial result in first half '22 and have today tightened our full year FFO guidance range to $0.351 to $0.356 per security. While maintaining our focus on operational excellence across our business, we have made significant progress towards executing the strategy that we outlined to you in November last year. Today, we have announced the sale of our Retirement Living business to EQT for close to $1 billion, which is broadly in line with book value and equates to a multiple of approximately 18x based on the FY '21 FFO contribution from the business. EQT has a strong record in retirement living, and we are confident that it will be the right custodian for the residents and employees in our Retirement Living platform. We have also announced the establishment of 2 significant capital partnerships with blue chip capital partners. This includes a land lease communities partnership with Mitsubishi Estate with an initial value of approximately $500 million and strong near-term growth opportunities and the formation of a capital partnership with Ivanhoé Cambridge to deliver the $2 billion in M_Park life sciences and technology precinct. These new partnerships will create new, high-quality recurring income streams and development margins and will enhance our return on invested capital. These 3 transactions are in aggregate expected to be accretive to FY '23 while materially reducing our balance sheet gearing by approximately 7% and taking cash and undrawn facilities to approximately $2.5 billion on a pro forma basis. The divestment of our Retirement Living business is a transaction that dynamically reshapes the composition of our portfolio. It fundamentally and significantly shifts our allocation of capital, simplifies our business, strengthens the balance sheet and concentrates our focus on higher-growth strategic initiatives. The new capital partnerships set up the foundation of our third-party funds management platform with 2 high-quality institutional capital partners. The Stockland residential rental partnership in the land lease sector with Mitsubishi Estate will have an initial value of just under $500 million and a $4 billion development pipeline. This transaction will enable us to accelerate the realization of embedded margin across our masterplanned communities land bank, generate new high-quality recurring management and rental income and improve our return on invested capital. The capital partnership with Ivanhoé Cambridge will deliver the $760 million stage 1 of the M_Park life sciences and technology precinct, Ivanhoé Cambridge will have the opportunity to participate in future stages of the project. The formation of the capital partnership will generate development margin and related fees and ongoing recurring management fees. There are 4 key pillars of our strategy: dynamically reshape our portfolio, accelerate our $37 billion development pipeline, scale capital partnerships and generate sustainable long-term growth. Our strategic priorities build on Stockland's trends as a leading creator and curator of connected communities, and the strategy is underpinned by key structural changes in the market, including urban renewal, growth in institutional capital, digital acceleration and ESG momentum. We are executing our strategy at pace. The formation of the 2 new capital partnerships, divestment of the Retirement Living business and further sale of noncore assets in our town centers portfolio concentrates our focus on the core of our business. This allows us to redeploy capital towards development opportunities in the residential, logistics and workplace sectors that we believe will generate superior returns on a sustainable basis. We are accelerating the development -- the delivery of our development opportunities. We now have $1.6 billion of active development underway across our logistics and workplace pipelines. We have enhanced our pipelines across the logistics masterplanned communities and land lease sectors over the half with strategic well-located and well-priced acquisitions. We have commenced further master planning across our portfolio and land bank to unlock additional mixed-use opportunities. Capital partnerships are integral to our refreshed strategy, enabling us to accelerate our rate of production and scale our platforms while also delivering new high-quality earning streams. In addition to the new capital partnerships announced today earlier this week, we announced a long-term partnership with the University of Western Sydney (sic) [ Western Sydney University ] to transform its Penrith, Werrington campus into a world-class mixed-use precinct. This project will leverage our deep mixed-use capabilities across multiple sectors. We are executing on our strategy while also delivering strong operational results. We generated FFO of $350 million over the first half of 2022 and are on track to deliver towards the top end of FY '22 guidance with a material skew to second half as previously disclosed. Our Residential businesses continue to perform strongly, strong demand for our MPC product has driven a 30% increase in contracts on hand since June last year, and strong pricing momentum has resulted in margin expansion. And our Land Lease Communities business is delivering sales volumes and pricing growth ahead of our acquisition assumptions for the Halcyon business. Our Commercial Property business delivered solid results. In particular, our town centers portfolio saw a progressive improvement in retailer sales as conditions normalized during the half. Leasing spreads were positive, and we achieved rent collection of over 95%. Our balance sheet is strong and has been strengthened further with transactions announced today. Our NTA is up 6.3% due to strong revaluation gains, and statutory profit is up by 150% to $850 million. We are focused on delivering strong, sustainable returns to our investors but -- we deliver sustainable returns, getting the balance right between economic, social and environmental outcomes is at the core of everything that we do. We are proud of our ESG track record, but we have more work to do to fight the effects of climate change, and we remain focused on decarbonizing our footprint, and we look forward to sharing further initiatives with you soon, including our strategies to address Scope 3 emissions. Our people and our brand are 2 essential elements of our success. We are proud of our people and what they achieve every day at Stockland. And it is pleasing to see that employee engagement has remained high during the pandemic at over 80%. We have now completed the reset of our leadership team, and we are building and harnessing the potential that is within the organization. It was also pleasing to see Stockland recently named as one of the 10 strongest brands in Australia. We believe the strength of our brand provides us with a key competitive advantage as we look to drive growth of our platform. It has been my pleasure to welcome Alison Harrop to our leadership team recently. Alison has hit the ground running, and I will now hand over to Alison to run through the financial result.

Thanks, Tarun, and good morning, everyone. I'm pleased to be joining you for my first results as CFO. And since arriving at Stockland, I'm excited by the momentum that I see across the business. We ended the half in a very strong balance sheet position, and that has been further enhanced by the transactions that we announced today. Our gearing stood at just over 23% at balance date toward the lower end of our targeted 20% to 30% range. As Tarun has mentioned, the 3 strategic transactions that we have announced post balance date see that number reduce by approximately 7% on a pro forma basis. We expect capital deployment toward our $37 billion development pipeline and for reshaping the portfolio to see gearing back within our target range within the next 12 to 18 months. Available liquidity of $1.3 billion at balance date will be supplemented by a further circa $1.2 billion upon receipt of the proceeds from the divestment of Retirement Living and the formation of the Stockland Residential Rental and M_Park partnerships. We expect our weighted average cost of debt for FY '22 to be slightly below the first half of '22 figure of 3.6% despite recent increases in the outlook for interest rates, and we have hedging in place for over 73% of our borrowings. We have managed our interest rate exposure prudently during a period of historically low interest rates, and that, combined with pro forma gearing below our target range, positions us extremely well in an environment of rising interest rates. Turning now to cash flow. Operating cash flow of $172 million for the first half of '22 was down from first half '21 levels. There are 2 primary drivers of this decline. Firstly, the larger-than-usual FFO skew to second half that we have previously guided to has also been reflected in cash generation. Secondly, we have invested more heavily in the growth of our Residential business over the half than in the previous corresponding period, with $268 million in payments for land included in operating cash flow. Funds from operations for the half was down by 9% versus the first half of '21. This is consistent with the material second half earnings skew that we guided to at the time of our FY '21 results. The key drivers of this skew are the timing of community settlements, the receipt of contracted retirement living village disposal profits in the second half and commercial property rental abatements over the first half. We have good visibility regarding second half earnings, giving us the confidence to tighten our guidance range for the full year to $0.351 to $0.356 per security. Turning to the key P&L line items. Logistics FFO rose by 58%. This reflects a combination of underlying income growth, and trading profits relating to the Gregory Hills project. Our Workplace portfolio delivered a flat FFO result. On a like-for-like basis, the result reflects growth of 1.9%, with a portion of the portfolio excluded from the comparable basket for this period as a result of development or predevelopment activity. FFO from our town center portfolio declined by just over 17% relative to the first half '21. Just over half of the decline relates to noncore asset disposals with the remainder reflecting a more material impact this half from COVID-related rental abatements and expected credit loss provisions. Our Residential Communities business delivered FFO of $122 million, down 10% on first half '21 and reflecting a more material than usual skew to the second half. Net sales for the half were in line with the volumes achieved in first half '21. However, settlement volumes were impacted by production timing. Our Land Lease Communities business contributed $5 million of FFO over the half. And this represents a part period contribution from the Halcyon acquisition, which settled in August 2021. The retirement living contribution for the half was down by 53% relative to the first half '21, and this reflects the recognition of village disposal profits in the previous corresponding period. We expect to book substantial disposal profits in the second half of this financial year. Both commercial property net overheads and unallocated corporate overheads were up versus the first half '21 levels. The primary drivers of the increase for both expense lines were investment in technology, including the impact of previously flagged accounting standard changes that now require us to immediately expense costs related to Software as a Service; normalization of our cost base post COVID-19 with the previous period reflecting cost-saving measures such as discretionary compensation reductions; and increased insurance premiums. Finally, net interest expense reduced relative to first half '21. This reflects a lower average net debt balance, a lower weighted average cost of debt and a slight increase in the proportion of borrowings subject to interest capitalization. Our distribution per security of $0.12 reflects a payout ratio for the half of 82%, and we expect to remain within our targeted payout range of 75% to 85% for the full year. In summary, we're in a strong balance sheet position with low pro forma gearing, ample liquidity, and we have good line of sight to second half earnings. I'll now hand over to Louise to take us through the commercial property result.

Thanks, Alison, and great to have you on board. Good morning. Commercial Property delivered solid operating metrics across the 3 sectors, with comparable FFO of 2.3%. Logistics has delivered 5.1% average rental growth on new leases and retail town centers had positive leasing spreads of 1.2%. Retail occupancy is strong at 99.1%, and logistics close to 0 vacancy at 99.9% occupancy. Rent collection across Commercial Property is at 97.5% with retail 96.5%, reflecting both the essential nature of the portfolio and the capabilities of the management team once again managing through COVID waves. As Tarun has outlined, this has been a very active half, delivering both sound underlying operating performance and materially advancing our strategic priorities. In Workplace, we've secured the capital partner for M_Park, joining with Ivanhoé Cambridge to deliver the initial seed stage valued at approximately $760 million. In Logistics, we've again accelerated the development pipeline with 5 DAs lodged across 150,000 square meters with an end value of $370 million and further bolstered the pipeline with the Padstow acquisition presenting future development potential. In Retail, we've executed on $310 million of noncore disposals. The remixing of the core portfolio has delivered positive spreads of 1.2%. The essentials goods and services, small to mid-sized assets, have delivered good valuation growth, which I'll touch on shortly. And we continue to advance master planning opportunities across our land bank. So we're particularly pleased with the project -- with the progress on execution. The quality of the Commercial Property portfolio is reflected in the net valuation increase of $543 million, a 5.5% increase on June 2021 with 88% of the portfolio independently revalued at 31 December. Cap rates compressed across all 3 sectors, with retail town centers at 5.9% with a $252 million uplift. Logistics had the largest compression to 4.2% and a $262 million uplift, and Workplace compressed to 5.4%. So overall, a pleasing uplift across the portfolio. This revaluation is a byproduct of the quality of the Workplace and Logistics assets and the progressive improvement we've made to the Retail portfolio. Our town centers portfolio remained resilient in the half with positive total MAT growth of 0.6%. WA and Queensland, with less COVID restrictions, had total MAT growth of 5.3% and specialties MAT growth of 10.8%. We achieved 4.2% MAT growth on the essentials retail categories versus pre-COVID periods, making up over 75% of total portfolio sales. So we've weathered the situation well. We've delivered comparable FFO growth in our retail town centers of 2%. Despite ongoing COVID restrictions, we see tenant confidence returning. We've achieved positive leasing spread of 1.2%, driven by competition for retail space in our assets, underpinned by 99.1% occupancy. Incentives have decreased from 14.2 months to 11 months with churn levels indicative of our remixing focus. Occupancy cost is at 15.9%. 313 leasing deals were done in the half, over 51,000 square meters, and rent collection is at 96.5%. The team has been proactive in remixing the retail town center assets and the results highlight the strong capabilities of our management teams. In Logistics, we've delivered 3.7% FFO growth. We're at our highest ever portfolio occupancy of 99.9%, and performance has been driven by 5.1% average rental growth on new leases. FFO includes the Gregory Hills trading project achieving margins of 28%. We've leased more than 300,000 square meters over the half, and rent collection continues to be high at 99.6%. We've been deliberately building the scale and quality of the portfolio over the last 5 years. And I've been speaking for some time about the depth and expertise of our logistics team, and you can see the impact of this on the portfolio and the results. We're delivering our strategic priority of accelerating the $3.2 billion logistics development pipeline. We've grown the 5-year development pipeline rollout from the historical figure of $150 million per annum to a forecast $400 million per annum. We have 10 projects in delivery, over $1 billion will progress in planning and a further $1.3 billion in master planning. Five development applications representing an end value of $370 million across 150,000 square meters were lodged in the first half. So as you can see, we're not only active in building the scale, we're also active in building the quality. Workplace delivered comparable FFO growth of 1.9%, rent collection was strong at 98.9%, occupancy at 90.6%, and the WALE is set up for the development pipeline. We're designing the workplaces of the future. The strength of Macquarie Park and the quality of the M_Park development was evident in the capital partnering process recently undertaken, and we're looking forward to the future with Ivanhoé Cambridge. Stage 1 of M_Park is now at 62% pre-committed and construction underway on 2 of the 4 buildings. All buildings are due for completion in 2024. The planning process on Affinity Place and Piccadilly developments continues to progress. These 3 developments will deliver curated modern workplaces focusing on physical and digital innovation and employee amenity in response to the structural shifts now occurring. We're creating assets to deliver the new ways of working with modern, relevant and fit for tomorrow workplaces. Commercial Property is delivering on the strategy of reweighting the portfolio and accelerating development opportunities, whilst the current assets delivered solid results across town centers, logistics and workplace. Across Commercial Portfolio, you can see we've got a portfolio of quality assets, a growing development pipeline and great capability to deliver. This sets us up well to leverage that platform for growth and further capital partnering opportunities. I'll now hand to Andrew Whitson.

Thanks, Louise, and good morning, everybody. Over the past 6 months, we've seen extremely strong customer demand across all 3 segments in Communities business. And this has driven record sales and margin expansion. Despite some settlement deferrals into FY '23, we remain on track to deliver forecast FFO for the full year. Having restocked at the right point in the cycle and record contracts on hand, the business is well set up for future growth. [ Progress indicates ] the strategic priorities we identified last year has been significant over the past 6 months, including extending our leadership position in masterplanned communities through taking advantage of the strong market conditions, rapidly scaling our Land Lease business by building our total portfolio to over 9,000 home sites and introducing a high-quality capital partner. And as Tarun announced earlier, we've entered into binding contracts with EQT for the sale of our Retirement Living business. On to the result for the Residential business. This result highlights the strong market tailwinds over the past 6 months with contracts on hand up 30%. And on the back of continuing strong price growth, the average price of contracts on hand is 14% above prior settlements. This has resulted in us increasing our FFO margin guidance to above 18% for the full year. Supply chain disruptions and wet weather in Southeast Queensland had impacted production and reduced our settlement guidance to around 6,000. These 2 changes to our full year guidance effectively offset each other, and our FFO expectations remain unchanged. Taking a closer look at net sales and inquiry. Over the past 6 months, we've continued to experience very strong demand, which has significantly exceeded supply, and we reduced our marketing spend accordingly. This has resulted in us reducing the number of stages released to allow production to catch up. This impacted January net sales figures, which were down on the prior year, primarily due to no new releases in New South Wales. So overall, it's been a strong start to 2022 with consistent demand with conditions experienced last year. I'm particularly pleased with the early cycle restocking that we've been able to achieve this year. We made a call at the onset of COVID and moved swiftly to take advantage of market disruption to build our land bank. And since the start of 2020, we have acquired approximately 23,000 lots. And given the rapid price growth that we've experienced across the Eastern Seaboard over the past 12 months, the embedded margins in our 82,000 lot land bank have grown significantly, underpinning future years' earnings. Now our outlook for the year ahead. We generally expect price growth and sales volumes to moderate over the next 12 months due to the upward pressure on interest rates. In Victoria, volumes will ease but relative affordability is expected to continue to prices in the year ahead. Supply constraints that are the most acute in Greater Sydney and Southeast Queensland will underpin positive price growth in these markets. And in WA, the market is expected to strengthen with the pickup in interstate migration following the reopening of borders. So overall, the Masterplanned Communities business is in a strong position for further growth on the back of record top contracts on hand, increased embedded margins in our land bank and the strong competitive advantage that we have in this sector. Turning to Land Lease. We see land lease as an attractive sector and our businesses performed ahead of expectations over the past 6 months, delivering 210 net sales and, on average, 12% price growth, both significantly ahead of our forecast when we acquired Halcyon. The strength of price growth is translating to margin expansion. Ultimately, we expect the combination of sustained customer demand and further activation of our pipeline will drive a material increase in settlement volumes over the coming years. In the near term, however, wet weather in Southeast Queensland and supply chain constraints are expected to see our FY '22 settlement volumes fall below our previous target of 300 home sites. We expect 60 to 80 of these settlements to defer into FY '23. Through our land bank and masterplanned community acquisitions capability, we have a strong competitive advantage in building our land lease pipeline, which now sits at over 7,000 and is the largest in the sector. Today, we also announced a capital partnership with Mitsubishi Estate Asia for the establishment of the Stockland Residential Rental Partnership. Strategically, this partnership will support the rapid growth of the Land Lease business, accelerate the realization of development margins from our land bank and enhance returns. The current value of the initial portfolio is approximately $500 million, with a future pipeline having a realization of around $4 billion over the initial 5-year investment term. So overall, in the past 6 months, we scaled the business significantly and built market-leading capability through the integration of the housing platform. This, together with our growing pipeline, has set the business up for strong growth over the coming years. Now on to Retirement Living. The Retirement Living business saw a significant pickup in sales over the second quarter as COVID-related restrictions eased. The combination of easing restrictions and favorable established market -- established housing market conditions drove November sales to their highest level on record for this business, and inquiry levels have remained strong through the start of 2022. On a full year basis, we continue to expect FY '22 FFO contributions to be approximately $30 million higher than the prior year. As Tarun highlighted, the sale of our Retirement Living business to EQT delivers on one of our key strategic priorities that we outlined to you in November. It refocuses and simplifies our business and provides capital for redeployment into other high-returning areas, including our land lease platform. The transaction price, within 1.9% of book value, reflects investor demand for the high-quality product and platform that we've created. We have a passionate and dedicated team in our Retirement business, who will provide a remarkable support for our residents during COVID. Our team will transfer to EQT at the time of completion. So in summary, operationally, the Communities business is performing strongly and positioned for further growth, and we've made significant progress in reshaping the business through the execution on our strategic initiatives. I'll leave it there and hand back to Tarun.

Thanks, Andrew. In the short amount of time since the strategy update in November, we have achieved a great deal. We are executing a disciplined strategy. Our ROIC discipline is an essential driver of sustainable returns, ensuring that we allocate capital in the most efficient manner possible, and we are on track to meet our ROIC targets this year. We are dynamically reshaping our portfolio, focusing our capital in the highest returning sectors. We're accelerating the delivery of our development pipeline. We have extended our market leadership in residential and are now utilizing third-party capital to expand our footprint in targeted sectors. So in summary, we have performed well over the first half of the year. We have good earnings visibility and are tightening our FFO guidance range to $0.351 to $0.356 per security for FY '22. This guidance remains subject to no material deterioration in current market conditions and the continued easing of COVID-19 restrictions as well as the assumptions outlined in our disclosures. Residential markets remain positive with elevated demand levels, and we are benefiting from strong embedded margins, driven by price growth across our land bank in attractive growth areas, offsetting cost pressures. Our Commercial Property portfolio continues to perform well with strong operating metrics across our sectors. So as Stockland celebrates its 70th anniversary this year, we are very proud of our rich history and the lasting legacies we have built, and we're looking forward to an exciting future and remain driven by a purpose, there is a better way to live. We will now open the lines for question and answers.

Yes, Tarun. So we have a few questions online. Our first caller is Lauren Berry from Morgan Stanley. Lauren?

My first question is just around guidance. You tied in the range to the upper end even despite a lot of those resi and land lease settlements slipping into FY '23. Can you just talk about what was the driver behind that upgrade and what might be doing better in the business versus when you go [ back ] 6 months ago?

Lauren, thanks for the question. Yes, I think a couple of things. Firstly, we did guide to the second half skew at our previous guidance when we caught up, and that is still in place even despite some of the lots moving into FY '23 in the Residential business. Our margins have expanded, as Andrew touched on. So that's providing the confidence. And also in our Commercial Property portfolio, underlying performance in our town centers has been very solid as well. So that's doing that as well. We have flagged in the second half some transaction profits, which were flagged before in Retirement Living, prior transactions that are settling, so they're still on track. And we also have the industrial assets in Gregory Hills and Melbourne Business Park potentially also coming through. So it's a number of factors, but it is -- the business operations are tracking in line with our expectation and hence, why we're tightening the guidance.

[Operator Instructions] So our next question is from Sholto Maconochie from Jefferies.

Good progress on the strategy there with M_Park and retirement. Can you just talk through some -- just on back on the guidance? So it seems like the lower settlement is partially offset by the higher margin. And you've -- both at the land lease and resi side of things. But can you sort of talk about the other the swing factors in that guidance number? Is that mainly the settlement in the range?

Yes, mainly, Sholto. Yes, it's mainly that, as we've noted, we've had lots move into next year. So that revenue is not gone. We're going to collect it in FY '23, but we have margin upside coming through, which is what's covering for that change. That's probably the main driver.

Okay. So the next caller is Richard Jones from JPMorgan.

It looks like maximum one question at this rate. But just interested in the JV you've established on the Land Lease business. Why does that not include the established assets that you acquired from Halcyon?

Yes, it's because of the strategy we've agreed with Mitsubishi Estate. So it's build-to-core strategy rather than acquiring core assets. So they're coming in at construction commencement of future villages, and the villages that they're picking up, the 6 villages, are all in delivery. And that's the construct of the partnership, that we will provide assets once they've reached planning construction contracts are in place. We probably got some presales. The site is serviced. And at that point is when the partnership takes ownership of these assets. So that's the reason. Stockland will retain the operating assets that we -- or the stabilized assets we bought with Halcyon. They're performing well, providing good recurring income. And I think I should -- hopefully, that answers your question. And I think you can ask another one, operator, if Richard wants.

Yes. No worries. I've put Richard back on the line. So if you have a follow-up, go ahead.

Okay. Just in terms of Gregory Hills, what was the profit [ book ]? And can you give us some guidance as to what is assumed in your full year guidance around Melbourne Business Park and Gregory Hills in the second half?

Sure. That was $28 million from Gregory Hills, which was actually a 28% margin on that project as well. So that's all come in, in the first half. In relation to Melbourne Business Park, it will probably be like Gregory Hills, as I've talked in previous results. Some may fall into this full year, some into the next year. So there'll probably be a split over those 2. In total, we're looking at about $34 million from Melbourne Business Park. And there's about $2.5 million still to settle on 3 final lots at Gregory Hills. So a total there of around $37 million still to come in, some into this full year, some into next year.

Okay. And just a follow-on. Is there any other restocking you've done in this income stream?

In relation to developed to sell, do you mean?

Yes, the industrial trading business.

No. We're -- mainly the developed to hold we're looking at now as we move forward. There will still be the occasional one, Richard, if we could buy well that we might do as a developed to sell, but predominantly moving forward in that pipeline, it's developed to hold.

Okay. So the next caller is Ben Brayshaw from Barrenjoey.

Tarun, the SRRP, could you just comment on the fee structures, the potential for promotes to be paid and the frequency of any of those performance-based payments just insofar as the new structure is concerned with Mitsubishi?

Yes, Ben. Yes, let me take you through how have we've done this. It's really -- we're very pleased with the significant capital that's going to now come into the partnership. There is a few drivers. As I said, once the partnership is operating, we will co-enjoy the returns, 50-50 or 51-49, coming out of it during the construction phase and then the operational phase. We will generate fees on top. They range, we've noted some of the fees in the ASX release, but it's fair to think about 60 to 80 basis points on an ongoing basis as the incremental fee we're going to generate above our stabilized returns and during development. And I think this point we do want to make, which is quite material point, that because the partnership is buying at construction commencement, the greenfield sites will be acquired from the -- by Stockland going forward. And of course, we've got our masterplanned communities, land bank, which we carry, as you know, at cost. So when those are transferred, at those point, we will be bringing forward earnings that are embedded in the land bank and substantially improving the NPV of our MPC land bank as well. And in FY '23, the 2 Stockland villages going in the partnership are anticipated to generate about circa $20 million in cash back to FFO, which would be on the partner half. So that hopefully gives you the building blocks development margin when things transfer because the cost of capital of the partnership is lower than our cost of capital or target returns. Development returns during the partnership stabilize 4.5 sort of cap rate returns, and then we generate another 60 to 80 bps in fees. And to answer your performance fee question. There will be performance fee at development completion. At that point, we'll measure how we went against the targets. And during the operational phase, there will be regular intervals like you have in a co-fund when we will measure performance fees. So they will depend on how the partnership performs over the long term. It is an open-ended partnership, so we do intend to be operating with Mitsubishi for many, many years to come.

Do you mind if I just ask a follow-up question on invested capital? Because obviously, the second tranche of Halcyon has yet to settle and there will presumably be capital release from the establishment of this new structure. To what extent is invested capital likely to grow over time for Stockland as you increase production in Land Lease?

Yes, Ben, I think there is some movements we've outlined in the release. I think net-net, there's about once -- there's a bit of debt financing that will go into the structure as well in the future. So in the next 6 to 12 months as the transaction settles, we get about $388 million net cash flow towards Stockland and then the partnerships, [ very pursue ] and goes forward. And I think the way to think about it is, Ben, there's -- over the next 5 years, we've currently got, and this may expand, but currently got $4 billion of development pipeline that's identified to go into production. Now clearly, that will be going into production and then we'll get sale proceeds. So that's the gross capital requirement. The peak capital will run lower. We are going to put debt financing in it. In terms of the exact numbers, maybe we can come back to you in the ranges that the partnership will operate. It will be in the hundreds of millions of dollars but maybe we can share that in follow-up conversations. But I think that's the gross capital target, $4 billion, but we've also got aspirations to buy assets on market. And now we think we've got quite a competitive structure in place to be competitive in the market as well. So obviously, the partnership has big ambitions, and our client has bigger ambitions in the sector.

Okay. So next on the line is Sholto Maconochie again.

Just a little bit answer just on the capital partnering side of things, but just more on the deployment of that capital. Obviously, the gearing goes down quite materially of circa 7%. You sort of talk through the timing of deploying the capital into the pipeline and how sort of, what's the sort of priority?

Yes, Sholto. So yes, I think we flagged predominantly our redeployments already identified into our development pipeline. Louise mentioned the acceleration of the on-balance sheet logistics pipeline reaching $400 million a year. So that will -- that's well identified and underway. Our land lease community is ramping up. We still elevated production in the next couple of years in MPC, which is still taking capital from the business. So we have a number of just organic opportunities well underway. Medium term, we've got Piccadilly and Affinity also getting ready for production. We're advancing planning. So there's quite a few requirements for the capital. We think over the course, obviously, this money is coming in, in the next sort of 6 months or so. So initially, there will be a drop in gearing, but it will start to, we think, over FY '23, we should be operating within our target range, probably at the lower end, barring any, obviously, new on-market things that we may do in between now and then.

Okay. And then just on Piccadilly, Affinity. Obviously Piccadilly, we had office, you'd probably pre-commit that. What level of pre-commits do you need to Piccadilly and Affinity? And when would you sort of typically anticipate to start them?

Yes. Thanks, Sholto. We will probably look at around the 40% pre-commit mark. Affinity, we're heading towards a DA there shortly. Earliest physical start would then be about mid-calendar year '23, and Piccadilly would be mid-calendar year '24. So that's the timing over those 2. Affinity is about a 3-year construction and Piccadilly about a 3.5 to 4-year construction.

And you bring in -- would you potentially want to de-risk your bringing capital partners for those projects and trading profits? Yes. Okay.

Yes. Yes, that's right. And we'd look to get the DA, the authority conditions in place, look to get a contract in place for construction and that pre-commit.

I think, Sholto, just I would say, if you look at M_Park particularly, that is the operating model that you should anticipate for Stockland going forward on workplace assets. We will add value during the initial development phase, do some pre-lets. And then when the capital heavy part of the equation comes in when we're going vertical, we will look to bring in high-quality capital partners as we've demonstrated today and generate the fees and returns on capital that comes with that activity.

And so Ivanhoé, will they be the main partner for the whole project of M_Park? Rather it being others, it's just 1 partner?

Yes. So that's the intention. We've -- obviously, the deal we've done initially is just on the initial stage 1 seed assets, but we would be anticipating, and that's the discussion we've had with our partner, that it becomes a partnership, a $2 billion partnership co and between Ivanhoé and Stockland. So that would be the intention. But clearly, we've got to do pre-lets and bring the new buildings once they secure DA back to the partner for their approval. So they will still need to -- we will need to agree pricing, et cetera, at that point. But clearly, the intention is to have a programmatic long-term partnership with a client that we really value going forward.

[Operator Instructions] The next caller is Stuart McLean from Macquarie.

First question is just on AFFO and leasing costs increased by $9 million per pcp. And you started to touch on what's driven that and what we should expect going forward for that line item, please.

Yes. Yes, logistics and retail leasing costs there, a bit more detail you'd like, Stuart?

Yes. Maybe we can get in the detail, but it's -- yes, there's been some leasing done, as you can see, in the logistics portfolio and of course, quite a bit of activity in retail. So that's where the leasing costs are coming from.

Yes.

Yes. I was just interested in retail because incentives have come down in terms of number of months, number of deals are down slightly as well versus pcp. So what's driving that increase in incentives in retail, please?

Louise?

It will be related to the remixing Stuart. So yes, incentives generally across the board are pleasingly coming down, but it always depends upon the category that you're leasing to and the remixing and the cost. So some of that will also be related to. We did some big remixing of mini majors space like at Townsville and Green Hills, Rockhampton, where you're taking out H&M and putting in 3 and 4 retailers. What we get in return, we're getting sort of 20% to 30% uplift in productivity out of that space, but they come at a cost. A lot of that is now done. But as markets change and move a bit, then we'll always look to see is there more remixing we need to do.

Okay. So with re-leasing spreads being now positive, is that just being funded by other player incentives by capital?

No. No.

We're not getting to?

No, it's not.

Okay, in specific deals.

That's right.

In remixing.

Yes, that's right.

[indiscernible]

Yes. As you can see, our regular renewals and re-lets and new leases we brought in the incentive from 14 to 11 months.

Yes.

No, that's not it. We're getting some real net effective rental growth if I use that term in retail.

Yes, that's right.

Great. And my second question just on M_Park. Just looking to try and understand the comment that it will be -- the sell-down will be accretive to FY '23 earnings. Just in the annexure, seems like the cost to develop buildings A&B is about $300 million, calling up end value of $450 million. Is it simply it will receive half of that spread up-front from the capital partner in FY '23? Is that how to think about the trading profit? Or how do we think about that trading profit?

Yes, Stuart. Let me [ take it around ]. I'm not sure what you're looking at, but I'll give you the overview. So M_Park, I think you've heard us say before, we've been targeting a yield on cost of -- in the range of 5% to 6%. We are tracking at the upper end of that target yield on cost. The core cap rate on a fully let basis that we've been able to achieve, not unlike where the market, is in the very low 4s. So that delivers quite a substantial development margin in the high 20s. And the quantum is in the order of over $200 million on a 100% basis. So about half, about $100 million, will be booked on the partner share as FFO, cash-backed FFO, over the next 2, 2.5 years as the buildings are finished. So in line with construction and de-risking of the project. So we won't be booking it up-front. It will be done. But in FY '22, there is a strong component of that 100 or so FFO that comes in -- I think it's in the order of 40 to 50. We can confirm that, but it's in the order of that based on the de-risking of the project we've done. So that's how you should think about it, and it's on the partner share. Now that, together with the comment I've made on land lease accretion on the 2 villages going through, that more than offsets the impact of the dilution from the sale of the Retirement business.

Okay. How do we think about earnings quality then going forward? I know retirement was not seeing the return targets, but you're essentially replacing recurring earnings stream, albeit low recurring with low multiple trading profits?

We think we're substantially improving the quality of earnings. I think you and many others have questioned us on the quality of earnings coming through the Retirement business, the low cash-backed earnings. Now we're replacing them with much higher ROIC cash-backed FFO in our core business of creating value in alpha through the development activity. And these are, again, if you look at Land Lease Communities, we've currently agreed from Stockland Pipeline 2 villages going in. But I think in the appendices, et cetera, you will see there's another 15 to 18 villages to go through over the next 5 years. So it's not 2 now, there's so many more coming over the next 5 years. So this is a new operating model of regular development margin and value creation coming through as we execute on capital partnerships. And again, in the workplace space, we've highlighted M_Park. Now that delivers earnings over FY '23, '24 and partly '25. We've got stage 2 that's in DA. Then we anticipate that will start to generate earnings. We've got Piccadilly. We've got Affinity. You can see the model starting to take shape, and this is a much superior nominal ROIC and quality of earnings and cash-backed earnings than what we've had previously.

Okay. So we move on to our last caller, Alex Prineas from Morningstar.

A lot of my questions have been answered, but I was interested in the gearing. I was just wondering if you can comment on a bit more sort of a longer-term view beyond FY '23. As that $4 billion development pipeline over the next 5 years comes through, does that continue to push gearing up? Or do the sales proceeds sort of tend to level it off? And secondly, just the gearing assumptions for FY '23 that you've talked about. Does that include potential acquisitions? Or could that push gearing up a bit further as well?

Yes, Alex. I think the best way to think about it is we've said consistently our target 20% to 30%, and we will be operating within that range. I think midpoint is a good assessment in how we run the 5-year business plan to make sure we have capacity there. Obviously, in the short term, we'll have more capacity, so that's how we do it. I think today, we are demonstrating that Stockland has significant access to high-quality third-party capital, and that will be the key lever we'll be pulling to make sure our on-balance sheet gearing and also our look-through gearing is maintained within our target ranges. So we have now demonstrated serious access to institutional capital today. And I think in [Audio Gap] and to expand our footprint and our market share and our market position while maintaining a disciplined capital structure for Stockland. And I think this is the material change you're seeing today in the approach with institutional capital coming in, and this is not the only 2 capital partnerships we're going to do. We have flagged that we would like to have capital partnerships in many parts of our business based on the key thematics and the key competitive advantage and value creation that Stockland has through our skills. So I think this is really accelerating our capability to deliver on our strategy.

Okay. So that is the end of our call for today. That's the end of Q&A. Back to you, Tarun.

Yes. Thank you for your questions, and thank you for your time today. And we look forward to speaking with you again over the coming days. So thank you, and we'll sign off there.