Lendlease Group (LLC) Earnings Call Transcript

[Operator Instructions] I must advise you that this call is being recorded today, Monday, the 16th of August 2021. I would now like to hand the call over to your first speaker today, Mr. Tony Lombardo, Global Chief Executive Officer. Thank you, sir. Please go ahead.

Good morning, everyone, and thanks for joining the Lendlease 2021 Full Year Results Presentation. I'm Tony Lombardo, and it's an honor to present the current year -- financial year results as Lendlease's new Global Chief Executive Officer. Sitting here at Barangaroo in Sydney, I acknowledge we're on the land of the Gadigal people and extend my respects to their elders past, present and emerging. Joining me today is Frank Krile, Acting Group Chief Financial Officer. Today, Frank and I will cover the FY '21 financial and operational performance of Lendlease. I'll then cover the preliminary outcomes from my business review and the impacts for our outlook for FY '22 and beyond. On August 30, we'll provide a further briefing on strategy with more detail on the business review and the changes where -- we are making to extract the most from the group strategy, including enhancements to reporting and strategic progress across our business. We'll then take questions. Moving now to Slide 4. Our vision for the future of urban development is tied to our purpose as an organization. This purpose centers on forming vibrant and enduring communities that contribute to a more livable and sustainable future. As the incoming CEO, my commitment is simple: to create value for all those they interact with us and make a positive contribution to society beyond the places we create. Our first step is to simplify the business and adopt a more consistent approach across the organization to provide better transparency. This will help us identify the areas that create the most value, and more importantly, those that do not. I also believe this is the key to creating wealth for our security holders who have endured a difficult period. Since assuming the role of CEO, my conviction in the strategy of the group and its culture has only strengthened. However, there is more we need to do to unlock our full potential in being more focused and disciplined on how we operate and execute. Turning now to the group's performance for the year, starting on Slide 6. The group recorded core operating profit after tax of $377 million, up 83%. Core operating earnings per security was $ 0.548 with a return on equity of 5.4%, which is below our target range. Distributions per securities totaled $0.27, representing a payout ratio of 49% of core operating profit. Statutory profit after tax was $222 million. This included a loss of $181 million for the noncore segment and $26 million from property revaluations in the Investments segment. The group's operating metrics were solid across all segments. Strong origination contributed to the $114 billion Development pipeline, while work in progress, the lead indicator for future development production, was $14.5 billion. In Construction, new work secured was $8.8 billion on the back of increased public sector activity. And there is $14.9 billion in backlog revenue, $11.3 billion of which relates to external clients. Funds under management grew 10% to $40 billion. And the group's Investment portfolio declined to $3.5 billion, following a 25% reduction in our investment in the Retirement Living business. The enforced lockdowns and isolation from the COVID pandemic are having a significant ramifications for the way society lives, works and plays. This has been reflected across the real estate, we -- workplace occupancy, retail vacancy, and in some cases, population shifts from immigration and a population decline. As an organization, we have experienced significant adverse effects from the deterioration of these conditions. An extraordinary effort was made by our people to keep our employees and customers safe and to support the continuation of operations as the pandemic set in. While it is difficult to quantify the various impacts directly, we've highlighted some of them across our operating segments on the slide. Development projects that were impacted included Elephant Park in the International Quarter London and One Sydney Harbour, Barangaroo. Construction revenue declined by 16% compared with a 9% decline for hours worked, highlighting productivity issues that the team faced in addition to the overall slowdown in activity. And our Investment portfolio and asset management platform were impacted by retail center shutdowns. Turning now to health and safety on Slide 8. Getting our people home safely each day remains our highest priority, though tragically, as reported at our half year results, 2 people lost their lives on Lendlease projects during the financial year. Our thoughts continue to be with the men's families, friends and colleagues and everyone impacted by these tragic events. In 2008, we introduced Global Minimum Requirements, or GMRs, to provide a more -- a consistently higher standard and operating discipline that defines the Lendlease way for managing health and safety. And for more than 20 years, we've transparently reported safety data across all our operations where we have a presence regardless of who has statutory responsibility. This includes incidents and fatalities to non-Lendlease employees, such as subcontractor employees and visitors where the incident occurred on a Lendlease project. The application of our GMRs has been reflected in an improved safety performance across the past decade, but there is still more to do. In March, we released the fourth edition of our GMRs, which addresses updated work practices, incorporates lessons learned over the last 5 years and applies a specific focus on the health and well-being of our people. Given the nature of this year's incidents, we are sharing our learnings and advocating to the industry to bring about lasting change and credible transparent reporting. We'll continue to strive as an organization to eliminate incident and injury everywhere we operate. Moving to Slide 9. A decade from now, the world will be a very different place with impacts of climate change even more evident. The Intergovernmental Panel on Climate Change recently released a report suggesting the globe will hit 1.5 degrees warming by 2034. It's been a year since we launched our envisaged environmental and sustainability targets, and I'm pleased to share we have made meaningful progress. Earlier this year, we launched Mission Zero, a global campaign to raise awareness of our ambition to reach net zero carbon by 2025 and absolute zero carbon by 2040. We are phasing our diesel and gas and increasing our use of renewable energy. 100% of our construction projects in Chicago are now powered using renewable electricity. Our Australian Building business has provided carbon-neutral construction for 3 consecutive years now. And our MIND project in Milan aims to be 100% powered by renewable energy. All these measures support our net zero target. We have collaborated with our supply chain partners, tenants and residents to set pathways to achieve absolute zero carbon by 2040. This includes becoming a founding member of both SteelZero and MECLA, 2 industry groups driving change in demand for net zero carbon still and decarbonizing Australia's building and construction industry. In 2020, the Global Real Estate Sustainability Benchmark, GRESB, rated our Barangaroo office fund as the #1 ranked office fund globally out of 1,229 funds, and we had 7 funds ranked in the top 20. From a social sustainability perspective, we have shared value partnerships across all our regions focused on creating measurable social value by addressing the needs of communities. We've evaluated 8 partnerships today and determined we have created $47.3 million of social value or approximately 19% of our $250 million target goal. Lendlease launched its second Elevate Reconciliation Action Plan, outlining our commitment to First Nations people. The group also published its first global Modern Slavery Statement, which sets our actions taken to assess and address our modern slavery risks. Turning now to Slide 10. Substantial progress was made on the strategic priorities outlined at the market briefing in August last year. The divestments in the year aligned with our strategic priority of focusing on areas of our competitive edge. These include the completion of the sale of our Engineering business, US Telecommunications and Energy businesses, the sale of our Bingara community project and the realignment of our investments in the Retirement Living business. Post balance date, we entered into an agreement to sell the Services business. The capital from these divestments will be redeployed in other opportunities aligned with the group's strategic priorities. Six geographically diverse urbanization projects with an end value of $7.4 billion were added to the Development pipeline, including 2 major urbanization projects. The $3.5 billion Smithfield Birmingham project is planned to provide more than 3,000 homes. And in New York, 1 Java Street is intended to transform a city block into apartments for rent with an estimated end value of $1 billion. We secured our first urbanization projects in Los Angeles. While in Boston, we secured our first life sciences project. In Singapore, we secured the redevelopment of the Certis Cisco Centre. And in Tokyo, Lendlease data center partner secured its first asset. Investment partnerships worth $5.41 billion were formed across 5 projects with 4 different partners, including Ivanhoé Cambridge, who were introduced to the platform for the first time. The partnerships are diversified by location and product type, including exposure to the rapidly growing sectors of life sciences and data centers. In the Construction segment, the global launch of our new project management tool, OLi, aims to drive consistency and leverage knowledge across our platforms. I'll now hand over to Frank.

Thanks, Tony, and good morning, everyone. Turning to our financial performance on Slide 12. Core segment EBITDA of $918 million increased 27% on the prior year as performance recovered from the worst of COVID. However, the pandemic continued to impact the business with ongoing challenging operating conditions affecting each of the segments. Development EBITDA was up from $322 million to $469 million. The largest contributor to the Development segment was the creation of separate investment partnerships to deliver the first 2 residential towers at Barangaroo, generating $325 million of EBITDA. Presales by value currently stands at approximately 85% on Tower 1 and a little over half on Tower 2. Delivery is progressing well with completion expected in FY '24. The forward sale of Melbourne Quarter Tower, and a new joint venture partnership at Milan Innovation District each contributed approximately $50 million to EBITDA. There were 621 apartments for sale settlements in the year with 3 projects accounting for the majority: the East Taylor in Melbourne Quarter, Clippership Wharf in Boston and 3 buildings at Elephant Park in London. Two of the buildings at Elephant Park form part of the affordable housing component of the project, and therefore, generated lower margin. Three residential for-rent buildings completed in the year with a combined end value of $1.2 billion. There were 2 buildings at Elephant Park and 845 West Madison in Chicago also reached completion. As outlined on 1 July, the extended lockdown in London had a significant impact on rental demand at a time when the 2 buildings at Elephant Park reached completion in March and May, respectively. The expected time to lease up and associated rent levels has impacted the allowance for the rental guarantee provided to our investment partner. This has resulted in a provision expense of approximately $60 million. We believe this issue is specific to the first 2 buildings at Elephant Park, both in terms of the investment partner structure and the prevailing economic environment. A review of projects currently in delivery across our Development book has confirmed that a similar exposure does not exist across these projects. While settlements across the Australian Communities portfolio were up 17% to 2,228 lots, they were well below both target levels and broader performance across the market. The Construction segment delivered EBITDA of $173 million, up from $101 million. Despite revenue being down and a weak second half in the U.K., performance across the portfolio was good with overall returns at the upper end of the target range. Activity continued to be impacted by delays in the commencement of new projects and ongoing productivity impacts across sites. The Investments segment delivered EBITDA of $276 million, down from $300 million. Funds under management fees were lower, primarily due to the significant performance fee generated from the completion of Paya Lebar Quarter in the prior year. Asset management fees were higher with additional development management fees from securing $1.3 billion of redevelopment activity in the U.S. military housing portfolio, which more than offset lower retail asset management fees. There was also a modest recovery in the underlying investment income across the portfolio. Corporate costs of $161 million include group services cost of $128 million, which were broadly flat over the year. The remaining amount relates to treasury costs of $33 million. As outlined by Tony, the core operating profit after tax was $377 million, up 83%. The statutory result of $222 million for the year was impacted by the additional provisioning relating to historical engineering projects through the noncore segment. Moving now to Slide 13. The chart provides an overview of the major movements in net cash flow during the period. We commenced the financial year with $1.6 billion in cash. Underlying operating cash outflow was $469 million. This included approximately $200 million in operating cash outflow from the noncore segment, primarily attributable to the retained engineering projects. Core operating cash inflow, excluding the impact from the formation of the One Sydney Harbour partnerships, were approximately $700 million. This reflects cash flows from places proceeds, residential for-sale settlements, residential for rent and commercial completions and new investment partner initiatives. Following deconsolidation, the 2 Development joint ventures at One Sydney Harbour resulted in an approximate $900 million underlying operating cash outflow and an equivalent underlying investing cash inflow. Overall, underlying investing cash inflow was $948 million. Proceeds from strategic divestments in the year, combined with the One Sydney Harbour joint venture impacts, more than offset additional capital deployed across the Development and Investment segments. Strategic divestments included approximately $450 million in proceeds from the further 25% sell-down of the Retirement Living business. Net cash outflows from financing activities and other adjustments were approximately $200 million, taking the closing cash balance to $1.7 billion. Turning now to Slide 14. The group measures underlying operating cash flow to enable an assessment of cash conversion against group operating EBITDA. The measure is derived by adjusting statutory cash flows with adjustments to investments for net movements across Development inventories and the inclusion from investments of items, which are operating in nature. Analyzing this metric over an extended time frame provides a normalized view. Looking back over the last 5 years, our cash conversion has averaged 73%. Looking now at the group's financial position on Slide 15. The group is in a strong financial position with gearing at 5%, well below the 10% to 20% target range. The decline in net debt to $0.7 billion reflects the cash flow movements discussed on the previous slides. Invested capital of $7.7 billion is comprised of $4.4 billion in Development, $3.6 billion in Investments with the remainder in corporate and construction capital. Investment-grade credit ratings continue to form an important component of our financial strategy. The average cost of debt was 3.6%, and average debt maturity has been extended to 4.9 years. With respect to funding, the group continued to diversify its sources of financing with the issue of 2 green bonds during the year. We are now one of the largest Australian corporate issuers of green bonds on the back of these issues. The group is in a strong liquidity position with cash and cash equivalents of $1.7 billion and $3.2 billion in undrawn debt facilities. Turning now to our core operating business performance against the portfolio management framework targets on Slide 16. The average return on equity over the last 5 years was 8.1%, the lower end of the 8% to 11% target range. This reflects below-target range Development returns, Construction margins near the midpoint of the range and Investments ROIC in the bottom half of the target range. Returns over the last 2 financial years have been impacted by the pandemic. We anticipate these impacts to extend into FY '22 and FY '23 before the group ROE returns to its target range by FY '24. I'll now hand back to Tony for an operational update.

Thanks, Frank. Turning to Slide 18. Our real estate strategy of targeting key global gateway cities has resulted in strong growth across the platform and provides an opportunity to extend our leadership position in creating urban precincts. We've highlighted key metrics across our 3 operating segments and mapped our 23 major urbanization projects across targeted gateway cities. While there remains near-term uncertainty, we believe our gateway city strategy that leverages both our place-making skills and integrated business model is compelling. Moving to the Development segment on Slide 19 and focusing on the organizational performance. Our Development pipeline now stands at $114 billion, of which $14.5 billion is in progress. There was an additional $8.4 billion added to the pipeline, including the 6 urbanization projects outlined earlier. While that was well above the $3.8 billion in production, the growth in the pipeline was constrained by foreign exchange rate translations. The contributors to production included the completion of an office tower, Two Melbourne Quarter; apartments for sale in Boston, Melbourne and London; apartments for rent in Chicago and London; and land lot settlements in Australia. Production in FY '22 is expected to include the first 2 office buildings of Milano at Santa Giulia, apartments for rent and sale at Lakeshore East in Chicago, the Ardor Gardens retirement village in Shanghai and community settlements in Australia. Turning to the Development outlook on Slide 20. Work in progress has risen to $14.5 billion with $5.6 billion of commencements more than offsetting production. Across our urbanization platform, there are more than 40 buildings in 8 gateway cities in delivery and approximately 1,500 lots in delivery across our communities portfolio. The diversity and the range of commitments across 7 gateway cities and each of our production types highlights the breadth and depth of the Development platform. At the half year results, we shared our expectation of commencing more than $20 billion from the second half of FY '21 and the end of FY '23. The quantum was highlighted because it was -- it will underpin an annualized run rate of $8 billion in production as this product is delivered. Despite the ongoing impacts of COVID, the expectation remains unchanged. $3.6 billion was converted in the second half of FY '21 with more than $16 billion expected to convert over FY '22 and FY '23. There has been a delay on the timing of some conversions with commencements anticipated to be weighted towards FY '23. These delays are concentrated in London, notably, Silvertown and High Road West, and the West Coast of the U.S. with Van Ness and the San Francisco Bay project. These commencement dates have, on average, pushed out by approximately 12 months. However, 4 of the 6 new urbanization projects that I referred to earlier are expected to commence prior to the end of FY '23. They are the life sciences project in Boston, the data asset in Tokyo, the mixed-use project in Los Angeles and the office redevelopment in Singapore. The master planned communities portfolio has reached a trough with an expected recovery in sales over the coming year to underpin anticipated stronger settlements in FY '23. Moving to the Construction segment on Slide 21. Resilience was displayed through a very challenging period with the business rebounding from the significant COVID-19 disruptions experienced in the second half of FY '20 to deliver a solid result. The teams have worked extremely hard to achieve this result, which is a testament to the collaborative relationships we have with our clients. Revenue was down 16% with activity impacted by delays in the commencement of new projects and ongoing productivity impacts across sites, both of which had a greater effect than site shutdowns. Despite weakness in Europe in the second half, the overall portfolio performed well aided by disciplined cost management implemented in response to COVID. New work secured of $8.8 billion was up from $7.5 billion with the Australian and European businesses benefiting from public sector activity. In Australia, new work secured of $4.3 billion was underpinned by several projects in the defense and health care sectors with private sector projects supplementing this work. The European business secured $1.5 billion of new work, predominantly from government clients across social infrastructure projects. New work secured at $2.5 billion in the Americas was well below our historical averages, reflecting subdued activity in the key markets, along with some delays in projects being brought to market. The outlook for the Construction segment remains subject to the potential ongoing disruption risk from COVID. Backlog revenue remained solid, having increased by $1 billion to $14.9 billion, $11.3 billion of which relates to external clients. The relating backlog relates to the integrated projects with the margin reported through the Development segment. The backlog remains diversified by client type and geography. However, public sector projects have become more important for the business in the near term and now account for more than half of the external backlog. This has also resulted in a shift in the sector mix with the social infrastructure and defense sectors becoming more prominent as a proportion of the backlog. Moving to Slide 22 and our Investments segment. Management EBITDA derived from funds and asset management activities across the group's investment platform was $165 million, down from $198 million. We've enhanced our reporting this year by clearly showing the revenues for funds and asset management separately, and we intend to provide further enhancements in FY '22. Funds management revenue of $145 million was down from $212 million due primarily to the significant performance fee generated from the completion of Paya Lebar Quarter in the prior year. Asset management revenue of $139 million was up from $105 million. $1.3 billion of redevelopment activity was secured across the U.S. military housing portfolio underpinned by the overall increase in asset management fees. Performance was impacted by lower retail asset management fees with COVID affecting activity across the sector. In terms of the outlook, funds under management closed at $39.6 billion, growth of 10% over the year. That was underpinned by additional residential for-rent product in both the U.S. and Europe and the acquisitions and new mandates across the platform. This more than offset the negative foreign exchange translation impact due to the appreciation of the Australian dollar. Assets under management declined slightly to $28.5 billion, reflecting the foreign exchange translation impact on the U.S. residential portfolio and modest valuation declines across our retail assets. The group's urbanization Development pipeline includes more than $50 billion of Investment product. This is expected to provide an underlying base for both funds under management and assets under management growth going forward. Turning now to Slide 23 and our ownership earnings, which are derived from our Investment portfolio. Ownership EBITDA was $111 million, up from $102 million, reflecting a recovery in our underlying Investment income, which more than offset lower asset sale profits during the year. The challenging retail environment also resulted in depressed returns across the group's retail investments. The trading performance of the Retirement Living business, whilst still subdued, recovered during the year, reflecting the strength of the established housing market in Australia. There was a modest rise in resales, coupled with strong price growth and an uplift in the sale of new units. The group's Investment portfolio closed the year at $3.5 billion, down from $4 billion, reflecting the sale of the U.S. telecommunications infrastructure business and the 25% divestment of the Retirement Living business. The Investment portfolio is well diversified with our predominant exposure being the retirement, office, retail and residential sectors. The group's strategy is to significantly grow its Investment portfolio, albeit off a lower base given the divestments in FY '21. This is expected to include retaining a larger proportion of completed assets from the Development pipeline and in investing alongside partners through the launch of new projects and products. Moving now to Slide 24, the noncore segment. I'm disappointed to report a provision of $168 million post tax to cover additional claims on historical engineering projects. Under the terms of the sale agreement for the Engineering business, the group retained some exposure to historical projects for which claims can be made a number of years after completion. Those current claims are subject to dispute proceedings and are expected to take time to resolve. The slide provides the main components of the segment performance, which is the sum to a loss of $139 million at the EBITDA level or $181 million post tax. The sale of the Engineering business completed in the year with the final payment from Acciona due on the 30th of June 2021 yet to be received. On a more positive note, we entered into an agreement with Service Stream post balance date for the sale of the Services business for a purchase price of $310 million. We are working with the buyer to complete that transaction prior to the end of the current calendar year 2021. Moving to Slide 26. We commenced a wide-ranging business review shortly after I started as CEO. While the review is yet to complete, I can share preliminary findings. We intend to present further detail at the market briefing on the 30th of August 2021. We believe our strategy and strategic priorities will provide the fundamental underpinnings for a very successful business. To extract the most out of the strategy, a new organizational structure and management structure is currently being implemented, so we operate the group with more focus, improve operational execution and capital management. There are 3 key elements. First, Australia will consolidate, resulting in all 4 regions operating under the same structure. Second, the 3 operating segments of Development, Construction, Investments will each have a group head to support an enterprise-wide approach to deploying products and capabilities. And finally, group functions will be streamlined. We expect substantial cost savings from the structural changes and other simplification opportunities post recent divestments. Targeted savings are greater than $160 million on an annualized basis with the benefits to be realized from the second half of FY '22. To achieve these savings, it is anticipated a restructure charge in the range of $130 million to $170 million will be accounted for in the first half of FY '22. A review of the Development segment confirmed the underlying strength of the Development portfolio, supported by capital-efficient business model with flexibility on both land payments and master planning across most projects. COVID is expected to impact the timing of profitability of projects over the next 2 financial years. We'll also be refining our go-forward capital partnering approach to Development projects, which will drive a greater alignment of profits with risk/reward and project cash flows. As I outlined earlier, we expect to reach our $8 billion-plus production target by FY '24 and the Development ROIC is also expected to be back within the target range of 10% to 13% by FY '24. As part of the Development portfolio review, a small number of projects have been identified, where a material change in Development strategy is under consideration. A range of strategic options are being considered to expedite the release of capital of these -- expedite the release of capital on these projects. Pursuing these options is expecting to result in an impairment expense in the first half of FY '22, statutory profit in the range of $230 million to $290 million pretax, representing a 5% to 7% of our current Development segment capital. Just moving to the outlook on Slide 27. FY '22 will be a reset year for the group, where we embed the new operating structure against the backdrop of an operating environment adversely affected by COVID. Earnings are expected to be heavily skewed towards the second half of FY '22. Statutory profit is expected to be impacted by the restructuring charge and the impairment expense outlined earlier. We expect the following operating return ranges for the 3 core segments. Our Development ROIC will be between 2% to 5%. Our Construction EBITDA margin will remain within that 2% to 3% range. And the Investment ROIC will be 5% to 8%. The group is well positioned to achieve improved returns as operating conditions recover with the ROE target range expected to be met by FY '24. We'll now open up for questions.

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

First question is just on the $160 million of flagged cost-out, so a bit over $100 million post tax. At the midpoint of your ROE target of about 15% to earnings, but your ROE targets haven't shifted. Things like cost-out helps you get to the old ROE target as opposed to being additive. Can you just run through that, please?

I think that is correct. The cost-outs will achieve us get back into that target range that we've outlined, and we have kept that target range as the range we're targeting.

So on a through-the-cycle basis, what does that mean for returns across the rest of the business? So mathematically, returns in Development or Investments need to be coming down.

And I think we've put that on the outlook page that I've just covered off. The return -- the ROIC for the Development segment is going to be 2% to 5% for FY '22. And we're saying -- and that's going to be between 2% to 5%. And we're saying we won't get back to our targeted Development ROIC range until FY '24, where we expect to get back into the target range of 10% to 13%. And the investment ROIC was the other one that we've highlighted that, that will be 5% to 8% in FY '22 compared to our normal targeted range of 6% to 9%.

In FY '24, you're going to have the added benefit of over $100 million of post-tax cost out and you're only going to hit those prior ROIC targets? So it means returns otherwise have reduced. And if you didn't do the cost-out, you were to downgrade that Development ROIC, for example, at 10% to 13% lower?

The key for us is what we are doing is, as we've made divestments to the business being the Engineering and Services and as we've experienced the impacts of COVID, we're taking action in the cost line and we're aiming to reduce the cost structure of the group. So those benefits definitely will flow through both at the corporate level and through the individual segmental level, and that's what we're targeting as an organization.

Okay. So maybe put another way, with the other benefit of the cost-out, should you -- is the ROE targets and ROIC targets now conservative and you should be beating those in FY '24-plus?

What, again, as I'm saying, FY '24, that's when we anticipate getting back into the return, Stuart. So we're giving that indication to the market. I think the key for us in FY '22 is to deliver the cost, which we'll deliver as you're stating an anticipated run rate cost benefit to the organization. But what we're saying is the market shifted because of COVID. So we've been in a weaker outlook environment and we're expecting to get back into our target return range in FY '24.

Okay. Second question, just on the balance sheet and ability to deploy that. Just a comment that you're looking to maybe look at investments and external market opportunities. Just where do you see the balance sheet maybe on a pro forma basis post these restructuring charges, post the provisions proceeds from Services. So 5% gearing, where do you think that is on a pro forma basis accounting for all of that?

So what I'll do is I'll just get Frank to give us a bit of a view on the balance sheet. So Frank?

Yes, Stuart. Thanks. As you note, gearing closed out at 5% for FY '21, so well below the 10% to 20% target range. If we look ahead, I guess, the main where we're going to need to deploy further capital is in that Development segment as we look to support the acceleration of production to that $8 billion-plus target. In order to do that, we're going to have to grow the $14.5 billion of WIP that we've got currently to $20 billion-plus. So on the back of that over the next 12 months, the expectation is for us to get back within the target gearing range. Within the next 12 months, I'd say we'll be tracking sort of bottom half of the target gearing range, taking into account that extra capital we're going to deploy in Development and also the proceeds that we're going to receive from the Services sale and the various other movements that you mentioned around the provisioning that we're going to have to take up.

Okay. And just a last question, just on the timing of projects that have been pushed out by 12 months, a couple in San Fran and London. Just the confidence of the rebound that is coming in FY '23 and we're not seeing the same situation next year where projects are pushed out another 12 months. Just what gives the confidence in the revised timing schedule.

I think we talked about there are 4 new projects that we added to the portfolio. So a number of those projects being the one in Tokyo, the one in Singapore, our new project in LA, all of those new projects we believe will be contributors to the production level over the next couple of years. So I think having secured those, it gives us a level of confidence. However, COVID is disrupting our business and we've got to factor that into account. So if things change, we'll update the market, but hopefully we've given you more clarity on the short to near term.

The next question comes from Simon Chan from Morgan Stanley.

I have 3 questions this morning. The first one, in relation to the $160 million of cost-out, can you give us a feel for which segments that will be mostly coming out of? Or is it going to be predominantly your corporate overheads? I mean I noticed your corporate overheads is only $160 million a year so imagine it's coming out of the segments. Am I correct?

So what I would say, we'll come back on August 30 to provide that better clarity on where the cost savings. But what we are, as I said, targeting is the $160 million of cost-out across the organization. Some of that will be at the corporate level and some of that will be across the segments, of course. So -- but we'll give you more detail at the 30th of August.

I look forward to it then. And then just on Developments for FY '22 and what we have to look forward to. Can you give us a feel as to what's in the cupboard? I mean I would imagine a bit of Ardor Gardens will be coming through contributing to Development profits there. But what else is there? I can't think of too many other projects.

Yes. I think I did state earlier, but the key ones will be the 2 office buildings at Milano Santa Giulia. We do have apartments for rent and sale at Lakeshore East in Chicago. Of course, you just mentioned Ardor Gardens, that's correct, in Shanghai. And we've got our community settlements in Australia. So they would be the key areas that I would say are in the pipeline at the moment for production in FY '22.

And probably just other ones to note. Currently targeted for the early part of '23, but Sydney Place is tracking well. So that's potentially also a contributor to FY '22.

Fantastic. And just a subset to that question. You brought up master planned communities. Are you budgeting for presales to hit your 3,000 to 4,000 target in '22? Or is that more of a '23 story?

It's more of a '23 story. What we will see is a better -- we anticipate a better period this period. We're very focused on a number of projects we need to put into production, and that's the focus for the team. And we anticipate that we should be able to get back to where we were in FY 23.

Yes. And just my last question this morning. The anticipated core operating returns for Development ROIC of 2% to 5%, have you implicitly -- for FY '22, have you implicitly factored in any new profit recognition accounting strategy when you came up with that number?

Yes. What we've factored in is we've made refinements to our capital structuring approach with capital partners and that's going to better align risk/reward and cash flow. So that is factored into our go-forward business plan.

The next question comes from Sholto Maconochie from Jefferies.

Just on the impairment in Development, it's sort of related to Stuart's question on the ROIC, but you've got your booking sort of $230 million to $290 million, which is 5% to 7% of the Development capital. So that's obviously going to improve your target if it's not denominated lower. So you sort of talked on what sort of projects they are and how that changes come to that number of $230 million to $290 million and that will obviously help you get to your ROIC target by driving that off in this period. Could you sort of talk about that?

Yes. Look, I'll provide more color again at the 30th of August, but what I can say there's 2 key projects that's probably impacting that number the most. That's Deptford, and that is also the Brisbane Showgrounds. They would be about 80% of that change and we will provide some more details, but we're changing and looking at various different strategies for both of those projects to continue to be the master developer, but we will move away from how we're looking to use future production capital. So we are trying to make sure we generate the right going-forward returns that we would expect the business to deliver. But I will provide more updates -- or update on that at the 30th of August.

Right. And then just on the communities, you're still below the targeted sort of over 2,200 this year. What are you expecting to settle this year in communities?

So we're expecting our sales to pick up in '22, but that improvement in sales won't translate into, I guess, a large uplift in settlement until '23. So for '22, we still expect to be below the 3,000 to 4,000 settlement target.

Okay. And then is there anything going on in that $47 million not paid for Engineering? Is that -- is there anything in a severe of an issue with the projects transferred? Or is this they're delayed on paying that $47 million?

They haven't made their payment and we've started court proceedings against them.

Good. And then just on industrial, you obviously -- coming to the industrial part, you're saying for the 4% cap point, your competitors need to be evidently stable bidding on a portfolio of circa $1 billion. What's your strategy in industrial both in Australia where we've been buying assets and globally?

Yes. Look, we've got the industrial fund, which continues to look at growing its portfolio. So the team there has done some buying over the last period. What we will do is there's a couple of projects that we're looking -- we have in our own portfolio that we're going to continue to look at growing that as a new sector. We are talking to various capital partners about opportunities we have within the current pipeline and hopefully expand that out into that space in a bit more of a growth pathway going forward for FY '22 and onwards.

The next question comes from Tom Bodor from UBS.