Lendlease Group (LLC) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Lendlease's Market Briefing. [Operator Instructions] This call is being recorded today, Monday, the 30th of August 2021. I would now like to hand the call over to Mr. Tony Lombardo, Global Chief Executive Officer. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining. I'm Tony Lombardo, the Global Chief Executive Officer of Lendlease. Joining me is Frank Krile, acting Group Chief Financial Officer as well. At Barangaroo, we're on the land of the Gadigal people, and I extend my respects to their elders past, present and emerging. It's a great privilege to be able to lead Lendlease. And I've enjoyed my first, sort of, 90 days, actually being able to spend time listening to stakeholders, our customers, our people and just getting about -- just talking and hearing about the company. What it's done for me and the GLT is probably reinforced the belief that Lendlease really has some strong fundamentals, and we've got an amazing culture. And it's always nice to hear what customers have to say about you because it hones in where we need to stay focused as an organization. I do believe we've got a lot to do to really make sure we deliver on our full potential, and there's a lot to do over the next 5 years in the road map we are setting out. One of our key commitments as a leadership team, we want to make sure we do stay very customer-centric in our approach because I do believe that, that's going to deliver the ultimate best outcome when it comes to product, service. I think our founder, for those who don't know, back in 1973 said some very interesting words that are very meaningful for today's time. "The time is not far off when companies will have to justify their worth to society, with great emphasis placed on environmental and social impacts than straight economics." And I think our organization is really driven on some of those core principles. And I do think with ESG investment really hitting the fall recently in the institutional investor space, I think Lendlease is really in a great position because I do believe we've been very focused on some of these key aspects of social, sustainability and environmental. One area that we do need to enhance and the area that we haven't performed is on our financial returns, and we haven't been able to hit those targets over the last few years. And I think what we do want to do is make sure we stay focused to deliver those returns in the future. And some of the key things that have impacted those returns has been the underperformance of our Engineering business. And we have been impacted by COVID over the last 18 months, which has impacted our FY '20 and '21 performance. What I would say is, we have set ourselves some key targets this year and really reinforce our credentials when it does come to sustainability. And I think the new targets we set ourselves by being net 0 carbon by 2025 for our Scope 1 and 2 and our absolute 0 carbon by 2040 for Scope 1, 2 and 3, a key target. It's not like we, as an organization, starting from scratch. It's something we have been doing. And when you look at the delivery of our products over time, we have been delivering 100% of our developments, outcomes that are sustainable outcomes, for our end customers of those products. It's pleasing to see that our Australian construction operations has been net carbon-neutral over the last 3 years. And leading the way, we'll start to make sure we share that with our international businesses and get the whole operation working to that level. And it's nice to be recognized in the GRESB awards where Lendlease has got 7 in the top 20 funds. We've got over $20 billion of our funds under management, which is about 50% of our current fund, which is rated as some of the most sustainable investment products in the marketplace. And GRESB does rate some 1,229 funds. So our track record to date really puts us in great stead when it comes to setting ourselves the benchmarks in environmental. On the social front, we've set ourselves a target of $250 million social value creation over the next 5 years. Why is that important? Because we definitely want to see the impacts our urban projects have on the broader community or where we own assets, what benefits are we generating for the community. I think this is quite important for us to continue to enhance and build upon our competitive advantage of being leading placemakers in the marketplace. And then finally, I think Lendlease really has a focus around safety. And we want to be a key leader in the safety aspects of what we do. We're never going to compromise our safety approach, and we are aiming to be incident and injury-free. And I think with those foundations really put us in great stead, as institutional market looks to companies who are delivering on the sustainability outcomes and strategies. So hopefully, that will put us in great stead. But ultimately, we need to stay focused and deliver on our financial commitments. And we do have a pathway to get us back to those right returns by FY '24. If I turn to Slide 4 on the strategy, I think we spent a lot of time last year talking through our refresh strategy. And a number of the GLT and I were part of that process. So we still believe that the strategy is fit-for-purpose. So there's no real change to that strategy. The focus is really on the road map on how we are going to execute the strategy. What we do want to do is make sure we put greater discipline and more rigor into making sure we extract the most out of this strategy. So the strategy is still intact, and I'm reaffirming that today for you. If I turn to Page 5, the road map we are looking at, ensuring we follow over the coming 5 years, is one where we're looking to reset the organization, create and then thrive. And I think it's important to just step through each of those key areas. Firstly, on the reset. What we do need to do is make sure the business is fit-for-purpose. So we have the right level of focus. We do want to make sure we focus on our core operations, and we went a long way over the last 12, 18 months, making sure we've divested elements of the portfolio that we saw as noncore. What we are doing is making sure we optimize the structure in our businesses from a performance perspective. We are making sure we get the right cost base in place that's going to ensure that we deliver the right long-term returns. And we have done a fair bit of work on a portfolio review, which I'll provide more detail on as we go through this presentation. With getting the foundations right and staying very focused over the 23 and 24 years, we do want to make sure we achieve that $8 billion production target. To do that, we have to stay very focused on the -- and that is about what we commence over the next 2 years of projects to give the market confidence that we're tracking to achieve that anticipated production target. We have said we want to scale up in the investment space. We are aiming to launch new products and mandates. And I think it's important to continually invest in our people. Our people are at the heart of our organization and our people who really drive and deliver and execute for us. So we will make sure we've got the right programs in place to continue to develop and lead the market when it comes to our talent and career paths for our people. Then finally, if we get that right, what we are aiming to do is really drive sustained performance over time. And I think it's important to continue to make sure we understand the aspirations of where we went ahead. And I think that will put us in great stead. So if we do and commit and execute well over the coming years, that should lead to that sustained performance, that should lead to continued annual production greater than the $8 billion that we're targeting. We want to continue to lead when it comes to our construction operations and be at the best practice level. In the FUM side, we want to have greater than $70 billion of funds under management. So we are aiming to really scale up in that core area. We want to be the key and global employer of choice when it comes to our sector. And hopefully, we will have achieved all the key targets we've set for ourselves through our net-0 carbon target by 2025 for Scope 1 and 2 and making sure we have delivered our social value that we're anticipating to create. And I think very important steps for us to really set out our road map of what we need to deliver as a corporate. Just turning to Page 6. To be able to do that, one of the first things we've done through our strategy reset phase is look at the new operating model. The operating role that really is to ensure that we get organized to be more effective in our decision-making and more efficient with our decision-making. We want to be closer to the customer. We are ensuring our group has moved away from being a management company to a holding company. So it stays very focused on the strategy, the policies and how we execute. It's important to get the 4 regions operating the same way so we can deliver consistently across development, construction and investments. I think the consolidation of the Australian operations will mean we can deliver things in a more consistent way going forward. I've added a couple of key roles to my corporate structure. We've asked Denis Hickey to play the Chief Operating Officer role, and that was very important to support me on ensuring we get the consistency across the 4 regions. And I think we've created 3 new product roles at the center to ensure that we -- they're very streamlined roles and very lean teams to make sure we've got the consistency and knowledge share occurring across the disciplines of development, construction and investments. I think if we get this right, we'll be making better decisions, and I do believe that we will deliver better customer outcomes. The final area is we do need to make sure our enterprise services are set up the right way to deliver a more cost-effective and efficient service across our organization. Touching on the people part. I think we have a great culture at Lendlease. We want to continue to enhance that culture. We want to make sure that we get safety right. Diversity is critical in all forms. And making sure our staff are well looked after from their well-being. So that is a critical priority. We have refreshed our people strategy recently. We've brought in a new Chief People Officer in Deb Yates. So that is all about making sure we stay focused on retaining and attracting the best talent in real estate. And ultimately, we're going to continue to invest in our people, as I said earlier, around our core training programs because we want our people to really continue to evolve, and we're going to give them the right career paths for the future. If I turn to Slide 7. When I look at the cost base, there are a couple of key actions that we needed to take as we have downsized our operations. And really, some of that has come about because we have exited the noncore. We have sold our Engineering business. We have entered into the contract to sell the services business. And we aim to close that by calendar -- this calendar year. That means our staff levels have reduced in Australia by some 4,000 people. What that has meant is we do need -- we have less projects to manage. So therefore, we need less functional support. We have a less -- lower need for occupancy as we've reduced the amount of people we have in Australia. And we must recalibrate some of the discretionary spending CapEx investment we're making as we're less complex. And we're taking away areas of the business that we no longer will manage going forward. In Australia, we've made sure we can operate under 1 leadership team. So we are driving benefits by consolidating 2 management teams into 1, and that ensures that we get the consistency across all the markets that we operate in. And as I stated earlier, group will move from a management company to a holding company's approach. This allows us to really stable focus, streamline and really focus on strategy, capital management and governance, which I think are going to be crucial to us ensuring that we execute. As you can see from the pie chart to give you a bit of an idea of where the compositions of the savings are coming from and how we're doing that across people, occupancy and other costs. If I turn to Page 8. What I wanted to ensure we did was actually provide enhanced reporting when we look at the Development segment. And I think when you look at the $114 billion pipeline, I think people want to have better clarity and the market wants to understand this more. And I think that was one of the key comments I received as I was on my listening tour in these first 90 days. So one of the things we've done and have split out going forward is to give better clarity around how we operate. And hopefully, you can understand better from origination to production, how the timing of our projects were and have a better understanding of where our capital is deployed against various aspects of the pipeline. So just touching on this, if I go through the various phases of development, and I'll start with conversion. We've got over 50% of the pipeline, $59 billion, in conversion. These projects are secured, but we haven't received the master plan approvals for these projects yet. So the teams are very much focused on, what we call, that conversion phase. And it typically does take us anywhere from 2 to 3 years to get a project secured. So it's important for us to work operationally and the teams to focus on this. As you know, we've secured a lot of new projects over the last 3 years internationally. So our teams across Europe and the U.S. are very much focused on the conversion of these projects from conversion phase to the master plan phase. And ultimately, when they do get master plan, some of the approvals do work differently. So like recently in San Jose in the San Francisco Bay Area project, we've managed to secure the first phase of that project 1A. So sometimes, we'll see projects receive part master plan approval. In other markets, we do see some of our smaller projects convert faster into master planning. So this is a key area we want to make sure the market understands better. As you can see, we've got $0.5 billion of capital. Against that, we do deploy a capital-light land management model, which does mean we manage our capital more efficiently when it comes to holding those projects. In the master plan phase, we do have $40 billion of our pipeline there, which is $1.2 billion of capital. So in this phase, we're very much focused on obtaining individual building approvals and consents, launching products to secure income via either presales and preleasing. We're working with investment partners on potential capital solutions to support the buildings or projects moving into delivery. So I think the master plan phase gives you a good indication of the forward look at what we're trying to bring into WIP. So these are key projects that we will continue to work on and make sure they move into that WIP balance. And then finally, as a business, you can see, we've got $15 billion of our projects in the WIP phase, which contributed to about $2.7 billion of our capital. That's where we are putting our capital to work because those projects are going into production. So therefore, we're using a greater proportion of that capital. What we will do is continue to look at adding projects to the pipeline in FY '21. We had $8.4 billion of new projects added to the pipeline. And in the recent years, as I stated, we've -- a lot of our origination has been in our international markets. So about 70% of the pipeline now is in Americas and Europe. So one of the key areas for us going forward is to make sure we've got the right pipeline in Australia and Asia. So when you do look at the right-hand side of the page, that is what we're targeting to get to commencements over the next 24 months. We're very focused on making sure the -- we've got about 14 projects over 9 cities that we're focused on getting into -- from the master planning into that WIP production. And as you can see, on the conversion phase, there's 5 projects we're anticipating to get converted over that period of time and get them into that WIP production. So I think the organization is very clear on what we need to do from an operational standpoint across development to continue to drive that right level of momentum. And then finally, in the pie chart, you can see that 50% of the projects are for sale, either apartments or communities, and 50% will create new investment products across our commercial or our resi-for-rent business. So again, this is a key area we'll stay focused on. But what we have seen through the year, and this does change when we secure new projects. During the year of the last 12 months, we did secure a number of new projects; the life sciences project in Boston, the data center in Tokyo, the mixed-use project in Los Angeles and the office redevelopment in Singapore. And as you can see, all those projects are going to move into WIP and production over this next 24 months. So we'll be very targeted with our origination because that will also support how we put more projects into production. If I turn to Slide 9. One area that we've been focused on with the market is around WIP because we thought it was very important to continue to give the market some clear understanding of our work in progress. So you can start to see how we anticipate to hit that $8 billion production target. Over the last 5 years, we've had circa about $13 billion of projects in WIP, and that led to circa $4.5 billion on average production. You will see that in our -- FY '22 and '23, our production rate drops to $4 billion. The low point of that production is coming up in FY '22, where we anticipate that to be about $3 billion and then that picking back up in FY '23 to $5 billion. So we start to see a bit of a tick up. When you look at the FY '24 onwards position, there are going to be some key contributors to that production target that we're aiming to achieve in FY '24. And they are -- the key contributors are the 2 residential towers at One Sydney Harbour, the Melbourne Quarter Tower, completions at Elephant Park, Southbank and The Exchange TRX. So they're all key contributors to what we're anticipating to complete in '24. So they do make up circa about $7 billion of what we're targeting. As an organization, we are targeting to get our WIP balance up to that $20 billion. To do that, it's going to be very important for us to continue to convert the projects in conversion because that will lead to that right opportunity to put more projects into production. So turning to Slide 10. We did talk about at the results, our ROIC target of 10% to 13%. We don't anticipate achieving that till FY '24. And when we look at the urban portfolio that we have, we've got 32 projects across our organization, which makes up about $100 billion of our pipeline. And I think what we will do and we have done in the past is always use, where possible, capital-efficient management models. And that's been one of the key competitive edges of the organization, is to really focus on holding costs and how to manage those projects in a capital-light way. We do have strong embedded returns in our projects. And I think it's important to understand that we have completed a review and I feel very comfortable with the majority of the portfolio. I will touch on the projects that we've called out that we need to take impairments against. I think a couple of things that have impacted production in the near term. As you can see, we do have a large amount of our portfolio in conversion, which means those projects can't be put in production until we get them to master planning. So that is a key focus. COVID has caused delays for us. And we are very focused on making sure we continue to convert the right projects and commence the right projects. But that has delayed 12 months of probably project delays across various markets in Europe and in the Americas, which has led to a lower production level. And as we talked about at results, we have changed the approach that we want to do our JV structures. And that, we believe, is going to put us in a better stead when it comes to ensuring that these alternate structures going forward are better aligned in terms of profit, with cash flow and risk reward. Just on the chart, when you look at our capital, there's about 23% of the current urban development capital is in deconsolidated joint ventures where the upfront profit has been recognized in some of the prior years. That will decline to 10% by FY '24. And by FY '25, we expect that to be 0. In terms of the impaired projects, from the changing strategy on a small number of projects, the portfolio review did identify 3 of our projects producing well below the return targets that we had set, which represents about 90% of the expected impairment. If we pursue those current strategies on these projects significantly, additional capital would have been invested over their remaining lifespan at returns which would likely be lower than that single digit on average, which was below our target hurdle rates. So we'd prefer to direct that future production capital into higher-returning opportunities that we have in other parts of our portfolio. So we're considering alternate strategies, which will release approximately $500 million of capital plan. And that will be used across the medium term on other projects. So that's a positive that we are reducing our capital and redeploying it in projects we believe deliver the right returns. But this will have an estimated impact as we announced in our financial results of $230 million to $290 million pretax, and that impairment will be reflected in the first half of FY '22 in our statutory profit. The capital associated with those impaired projects, of which the 3 identified projects account for approximately 90% of that impairment. And you can see that we've got circa 17% of our urban development capital in -- or on the -- invested in these impaired projects. That does represent about 6.5% to 8% of our capital on the urban capital front. But as you can see, by FY '24, we're anticipating for that to get down to 5%. So in summary, what I would say on our projects, what we are focused on is project conversion, increased production, improving our operating leverage across the business, deconsolidated JV project completions and making sure they run off and deliver the right returns. And we want to make sure that we work through efficiently our impaired projects so therefore, returning our capital back to our targeted return levels. I want to touch on our new structuring approach on Page 11. Going forward, alternative transaction structures where investment partners will be better aligned with profit and cash flow and risk reward at the project level and the asset level is our approach that we're going to take. This will reduce some of the capital at risk through the delivery phase as we embark on more programmatic capital partnerships. This will support underlying operating cash flow conversion. And in our view, this will result in a material improvement in earnings quality as cash and earnings, at closer look, match more closely. And to be clear, there is no change in accounting policy or funding profile. Just on Page 11, we've used the Vic Cross integrated station development to just illustrate the impact on this change in approach. It's important to note, this is just an example and it's an indicative only. But in FY '21, when we sold 25% to an investment partner through a deconsolidated JV, we did make a gain on sale of circa $30 million, and we did have a $90 million revaluation gain on our 75% remaining interest. So that was a total upfront profit of approximately about $120 million. So vertical delivery of the tower is expected to commence in FY '22, and we anticipate additional earnings of between $50 million to $100 million on the project as we complete that project. Under the new structure that we intend to employ going forward, the upfront profit would have been limited to about 25% gain on sale to our investment partner. So that would leave an estimated $140 million to $190 million of future anticipated earnings with an outcome more closely aligned to the expected cash flows from that project. So touching on the Australian communities business to restore -- to touching just on the Australian Communities business and just we're very focused on making sure we restore performance on this business. We've got an extensive track record in delivery when it comes to communities. But over the last 3 years, we have underperformed our target of the 3,000 to 4,000 lot settlement target. And that has predominantly occurred because we haven't achieved planning on a number of projects, which meant we haven't had the right stock available for sale in the market. And we've missed some of the tailwinds that have been really over the last 12, 18 months in the market, and we haven't been able to match our competitors' performance. So this is an area that we are very focused on as a business, ensuring that we get this portfolio and business optimized, and we are disappointed that we've missed the last 12 months of the tailwinds. So it's important for us to stay very focused on our core competency and making sure we get the portfolio into production and get the placemaking right and restore performance. We do have a new leadership team in place, and we've reviewed the portfolio. We expect sales to accelerate in FY '22, which we believe will improve performance. And we do have 4 new projects, Shoreline and Pine Valley in Queensland, Figtree Hill in New South Wales and Averley in Victoria, which we aim to have in production. But there is always a lag between sales and the subsequent settlements and volume. So this will remain below the annual settlement target in the next 12 months. We've looked to reduce some of the capital in the business through the sale of Bingara Gorge, our community -- one of our community projects, and that was sold on some deferred terms. So we do have circa another $150 million of cash to come back into the business once we settle that project fully. But we do anticipate settlement volume getting back to our target by FY '23. Once we have restored performance in that business, we are confident that we will look at other capital options and strategies for the business over the long term to ensure that we get the right long-term performance in that platform. Just touching on Page 13, our Construction business. The Construction business has been a good consistent performer for the group for a number of years. And we will stay very focused going forward on key aspects of where we've got the right sector expertise, continue to grow our portfolio. The business provides a really important part of our operating and delivery of our integrated projects that gives us the certainty on how we execute those projects. And ultimately, we want to embed more digital capability into the business because we want to continually evolve and keep it as one of the leading and best practice businesses. So we'll continue to add and invest in our digital capability there. So touching on Page 14. The current investment platform provides a really good foundation for our ambition to move forward and to take the business to its next level of scale that we're aiming to grow the business to globally. As you can see, we have grown the business over the last 5 years at a circa 11% CAGR. We are targeting to get the business to greater than $70 billion by FY '26. That is going to be done by really continuing to develop the core and continue to evolve those products. But we do want to make sure we're acquiring assets in the external marketplace that we will look to use our balance sheet where we warehouse and seed new assets in a more regular basis to continue to grow new products and mandates. We will continue to optimize the portfolio, in particular, around the retirement living space, the military housing. And we will, over time, continue to look to recycle capital in our co-investments. What we will do is continue to participate with our investors in these core products as we grow this platform. If I turn to Page 15, we have made good progress in our investment partnerships, but the area probably we didn't make the progress we would have liked in the last 12 months was buying assets in the external marketplace. So it's -- we do have very solid relationships with 150 key investment partners. And what you can see is over the last few, 12 to 18 months, we've made really good progress in some of the new partnerships we've created with some of those core investments. And what we've done is create 4 different products across 4 different partners. We've added Ivanhoé Cambridge to our platform, which was a great outcome over the last 12 months in the life sciences space. We've done $6 billion of new partnerships we'll deliver from over the coming years. So that's quite important for us as we aim to grow our fund management. We've got great capability in the apartment for rent space as we've built that capability across U.S. and Europe. And we do have a significant amount of our pipeline in that space of $25 billion, so we'll aim to continue to develop more products in that space. I think on the data center front was a new area that we embarked on with a key capital partner, and we raised that capital first, but we have secured our first opportunity in Tokyo, which will lead to an end value asset being created of $800 million. As I pointed out, the life sciences space, we've created our first product there in the last 12 months, which is really a subset of the office market. We have deep expertise in the U.S. and Asia and Europe in the life sciences area, and we see this as a really growing sector that we will stay focused on. What we will aim to do is acquire more assets and reposition those assets as we feel we can add value. So we have got a launch of a REP 4 product coming up in Australia, which we see is another key product for us to get in the market as we look to evolve the assets we acquire in the marketplace. Touching on Slide 16. What I did want to do is provide a bit of clarity. Since FY '19, we have been investing heavily in digital. We see digital is quite important to expanding our suite of how we do things in a more efficient way. So there are a number of people we've brought into the business, and we are focused on a number of digital products that we are looking to create. In essence, they're very much focused on significant cost reduction potential across digitization, both in development and construction as well as benefit and enhance our customer experience, look to get better safety outcomes and more sustainable outcomes by having the right data at our fingertips. So we are in the process of really creating a number of key products in that space. I think these new partnerships will be critical for us to -- and products to deliver a differentiated approach with both to our capital partners and the way we operate so we can continue to really lead the market when it comes to our product creation. So we are very focused on this. Bill has been leading the team for a number of years. And what we wanted to do is make sure the market can understand what we are doing in this space. Just finally, touching on to cities. The pandemic has really been an interrupter to the business, not just a disruptor, as people say. I mean, ultimately, cities are destined to remain the center piece of modern society. Our innovation and human advancement is critical, both for the global economy. And we believe cities and the way they organize themselves are going to be pretty critical at that. We think markets like London and New York financial sectors, Milan's high-end manufacturing and fashion scene, Silicon Valley's technology and Singapore's global trading smarts, they are all key cities that are going to continue to recover post pandemic. And what we have seen as our markets have moved from lockdowns to reopenings, we've seen the vibrancy and people return to those cities. People don't want to be stuck at home or locked down. We are seeing those cities continue to be quite active. So we do believe that the social infrastructure and amenity of core cities do drive and mean sure people come back to those cities. So from time to time, we are going to have areas where we have a pandemic, we have wars, we have disease and plagues like we've just experienced. And I think COVID has temporarily impacted the way we live, work and play within cities. But we're pretty confident our global reach and capabilities will be leveraged as the cities recover. And I think our place-making will evolve to make sure we deliver the solutions that are needed to get those cities up and running in the right way. So we will continue to see cities and the urban landscape change, and we will be part of how those urban cities continue to grow and evolve. Just touching on Page 19. Ultimately, we'll continue to ensure that our products evolve with the changes in the market. I do believe our mixed-use place-making capability spanning across multiple sectors and support leading safety and climate policies and the adoption of technology are really going to put us in great stead across our core products. We do expect mixed-use capabilities to continue to need changes to really change with the times. So we are seeing more demand in innovation districts and transport hubs, which just means our product mix and how we approach our products is shifting to those key trends. So it's important for us to continue to evolve how our urban projects are mixed. Ultimately, in sectors, workplace flexibility is going to be critical to provide compelling propositions for both employers and employees. We expect requirements for space to be replaced by demand for the place, where the workplace is centered on collaboration and innovation, health and well-being are going to be critical. So our placemaking will put us in great stead as we continue to evolve the way the workplace needs to be transformed. We do believe the future of workplace is sustainable, it's agile, it's connected, it's inclusive and digitized. So we're going to have to continue to evolve our product that way. In the living space, we see that we're going to have to continue to evolve our options. We think higher density is important if you do it really well. It will play a role to make the city more livable. It does address concerns around affordability. It does eliminate and reduce congestion. Sustainability and social isolation are big key factors in today's society. And we believe if you do this right with the right level of product, we'll continue to support our people's health and well-being and mental side of things. So that is going to be crucial. And if I give an example recently where the Melbourne Quarter project and the regentrification of that site, which was dormant for decades, it's now very much a vibrant in a city precinct, with a diverse mix of workspaces, living, hospitality, retail and green public realm, and that was recently created. And we believe more and more that cities are going to need that. So we'll continue to create the right places with the right products across the sectors and our numerous urban projects. Just finally, on Slide 20, I think what we want to make sure we do is stay very focused on our competitive edge, make sure that we do deliver the right economic performance for the group over the long term. And I think to do that, we've got to stay very much focused on being an active portfolio manager, really looking to hit some of the key aspects of our targets and do that consistently. So I think they are the key things that will underpin and continue to allow the group to enhance and stay focused on our competitive edge. So I am going to pause there and open up to take questions.

[Operator Instructions] Our first question is from Sholto Maconochie of Jefferies.

Just a clarification. Obviously, the targets aren't changed. Just on the production, $8 billion by '24, is that back-ended second half '24? Is that the run rate? Or is it -- trying to understand is it run rate or back-ended? And when do you expect that $8 billion to turn it to completions and that sort of trajectory of earnings? Can you sort of give more color on that, please?

Yes. Sholto, that is a good question. I think in terms of what we are very much focused on is getting the commencements right. So on Page 8, I did just highlight what we had in master planning, which is going to be crucial for us to get to our $8 billion target. So you can see there's a number of critical projects. But if I do highlight that One Sydney Harbour, TRX Exchange, Melbourne Quarter, which are all projects, which we put into production at the back end of FY '21, they are all going to be critical projects that get to completion in FY '24. I think a number of those will occur in the second half of FY '24. So you could say it's probably going to be more back-ended to that FY '24. Now that's what we're anticipating. We've got to factor in that if the market conditions could change or the like, but we've set a bit of a road map for what we need to deliver to get us to that $8 billion-plus.

And then just on the accounting, if you take -- I think your invested capital was -- you're targeting $5 billion to $6 billion, you take 10% to 13%. So that sort of $500 million to $780 million profit on your ROIC target. Is that sort of how we should look at it going forward? And it's not going to change in accounting policy, but the change in how you book those JV projects. Is that how we sort of think about it looking going forward as a crosscheck both on the invested capital and the ROIC of $5 billion to $6 billion? Is that the best way to look at it going forward? Just sort of keen to understand that, too.

Yes. I think -- Sholto, again, very good question. That is the right way to look at that. You should view that $5 billion to $6 billion in that type of magnitude of $4.5 billion to $5 billion as we've got in the urban side of things. That's your good guide to what we should be delivering. So I think that is a good test to that. In terms of -- again, I just want to reiterate, it is a change in structuring, not accounting policy because it's just the way we're structuring the joint ventures, which are different, which would just mean the timing of profit recognition does become more smooth out and does match that risk reward better.

Just sort of to clarify. Obviously, the $4.5 billion to $5 billion of capital that we're flagging in FY '24, that's just an urban book. You've got a layer in the communities capital that we've, I guess, shown separately on the next slide, but ROIC target of 10% to 13% is across the entire development book.

Okay. That's good. And just finally, I know the order has been there for 50-odd years, is there any look at change in order given what's happened in the past around the businesses? Is that being looked at, at all?

I think we did a whole assessment back when I was a CFO, where we went through and did a tender out of the order. I think that's something for the Board that we will look at from time to time. So there's nothing that's imminent at the moment.

And then on the FUM target, like $60 billion, I'm just thinking -- I'm just trying to clarify the wording, it looks like that's getting some M&A or platform that segment in the external market, 30% and other growth. Is that alluding to M&A or to get to that target of $70 billion?

In the M&A, Sholto, it's what we're hoping to do is actually look at acquiring assets. So you will see the -- use our balance sheet where we may look to acquire a building if we're looking to seed a new product. And so what we're saying is we've got to do more of those types of deals to continue to grow. So not just to develop the core product, we want to ensure that we've got the right capabilities to be able to go after acquiring existing assets. So that's what we've factored into our plans over the next 5 years is to do more of that.

Good examples of that, I guess, in the last 12 months in Singapore, the team have secured the Certis opportunity. It's a value-add play there. And then in Australia, we're looking to get away the REP 4, real estate partners 4, funds, which again will be an office value-add play in the local market.

No. That's all good. I guess just $40 billion to $70 billion is a big number in 5 years. It's -- obviously, it gets the new mandates and maybe some platforms. Is that -- would that be assumed in that number?

That is correct. So we've got to crack some new fund products. And -- so that's going to be crucial to -- and launch more programs. So we're very focused on that as a team. And that's a big area that -- as we pointed, we want to scale up the investment side of our platform. So that is going to make up a big part of what we're trying to do. So again, it is an anticipated target. It's what we're setting ourselves to make that strategic shift. As we've said, our PMF targets 12 months ago, and we want to make sure that we stay focused on executing that.

Next question is from Stuart McLean of Macquarie.

My first question is just in relation to Slide 7, just on the cost out there, 70% of it being people. Just wondering how you're thinking about the impact on culture and maintaining your performance culture during this time of change for people in your business?

That's a very good question. I mean you don't take these decisions lightly, but I think one of the things we had to do is we've seen ourselves exit the noncore. And we've seen the impacts of COVID over the last 12, 18 months. We needed to take some action in how we looked at the overall structure. What I would say, it's a lot of the costs out, it's coming out of the functional side of things and is coming out of management layers. It's not impacting the direct workforce in the projects that we've got. So it's really targeted to areas where we're aiming to drive efficiency, and we had to because of the downsizing and what we're doing on consolidating the Australian operations. But one of the things we've been clear on internally with our people is making sure with our people strategy going forward. It is very much focused on making people want to stay here. We've got great projects. We're going to continue to invest in our people and really make sure that they're at the heart of what we do. So we don't believe the actions we're taking are going to impact that. But always, it does create a level of uncertainty when you go through these restructures like we're going through at the moment. So -- but ultimately, I think Lendlease has got an amazing culture and we'll continue to build on that culture.

And then also on cost out, 20% of it appears in group. So we should see that in the group corporate cost line item in the P&L when you report that? How do we think about marking Lendlease to these KPIs for $160 million, given most of the cost out in the division?

Yes. So obviously, as you say, Stuart, we do report the group services line separately, so you'll be able to see us make progress against that line. But I think going ahead -- going forward, we will be, I guess, reporting to the market as to how we're tracking across this target at both the half year and the full year.

Yes. And I think, Stuart, we'll ensure we keep doing that and give you the clarity. I mean it's important to be able to -- the market to see that we've actually delivered on the target we've set ourselves.

Okay. And my final question is just on the funding. And so on the investment side, I think 12 months ago on the Strategy Day, you said $6 billion to $7 billion of capital was required in investments. Is that something still to stand by?

I mean we definitely will need a level of capital at the moment. You can see we got circa about 5% of co-invested capital against $40 billion of FUM. So we're going to continue to look at our business and the capital we need to be able to support the funds that we're trying to grow in. Ultimately, the funds we're growing lead a level of alignment, and we need to ensure we've got that capital supporting that alignment.

Yes, I think we [indiscernible]. I guess, longer term strategically, we do want to -- always still targeting that overweight position greater than 50% in the investments relative to development. But in the short term, our expectation is that development will the overweight just given the amount of production that we've got to support over the next couple of years.

So you have to quantify the amount of investment capital in FY '24, like you have for development for the Investment division?

Let us come back and we'll take that off-line on that detail.

Okay. Because what I'm really trying to understand is that the capital requirement of an additional $1 billion in development [indiscernible] pipeline. And if you stick to the $6 billion to $7 billion for investments, that's an additional #3 billion of capital -- we're looking at additional $4 billion of capital for the platform to keep the strategy. I'm just wondering how you kind of get that $4 billion of capital if those targets remain?

Yes. I mean you can see that we're currently geared at 5% today. So there's some capacity that definitely sits on the balance sheet. And therefore, we'll be using some of the current balance sheet capacity. But we will be looking to move, as Frank said, in the short term, we've got production needs in development, and we'll be looking to, once those complete, have that capital move to the investment line. Now some of that will naturally occur as we're building and developing -- develop the core investments. And what I would say is some of the assets that we've got in production are still big uses of capital. So some of that capital frees up through the planned period. So you'll see that capital transition out of development into investments. But what we'll try to do is provide a bit more color around how we'll manage that to get to where we want to go.

A thing worth noting on the capital front, Stuart, just the impaired -- or the projects that we're expecting will be impaired at the half. As part of the changing strategy on those projects, we are flagging a likely release of up to circa $500 million of capital over the medium term. So that provides an opportunity to, I guess, increase the investment on the Investments side of the business.

Okay. And the balance sheet -- sorry, last question here. The balance sheet of 5% leverage. So what would that be if you included your development provisions or restructuring charges in your noncore provisions as well?

We don't have that detail on hand, but we'll come back to you on that question. The current gearing is 5% of the group.

Our next question is from Simon Chan of Morgan Stanley.

Just a few simple questions from me. First one, those projects written off are Waterbank, Showgrounds, et cetera, in practice, what's going to happen to them? Are you going to be selling them -- like, and I appreciate Frank's comment about releasing $500 million of capital going forward, but yes, just can you clarify what actually means and what you do with those projects in practice?

Yes. So on those projects, Simon, again, very good question, what we are aiming to do is we would have developed out those projects and we would have assumed to book production capital. So we will still master plan those projects. But what we will do is look to sell out as a master developer and plot seller. So we will continue to manage some of those key projects. So if I look at Deptford, for instance, we'll continue to make the investment that's necessary in the location and which is now minimal compared to where we've been, and we'll aim to sell plot by plot to other developers, and therefore, not using our balance sheet to develop, using other people -- or other people coming in to acquire the site effectively and develop. So it's small. We're looking at those alternative strategies. Same with Brisbane Showgrounds. We'll look to work with our partner around how we deliver the residential. And in terms of the office, we'll look to a packaging strategy on how we complete out the office. So it's important for us to make sure we're using our balance sheet as effectively as possible and looking to put the right investments in the things that we believe are going to hit the right returns for the group.

That's very clear. My second question relates to your Communities business. It looks like you've got a strategy in place to turn that around, but I was hoping you could elaborate on the fifth bullet point on Slide 12 there. It sounds like you want to turn around, improve the business and then assess potential alternative capital strategies. What does that actually mean? Does that imply once you turn it around, you could look at selling it?

It implies well -- again, good question. We are looking at the ways to best and most efficiently leverage and use Lendlease's capital. So if we think there is an opportunity for us to bring in different partners, we may look to structure how we do those projects differently. So we're just flagging that as something strategically that we'll continue to assess over time.

Great. And I just got 1 more this morning, Tony. In relation to slide, I think, Slide 8, Slide 9 or so, Slide 9, actually. So you're going to ramp up to production $8 billion by FY '24. And it looks like you've got that pretty much locked in anyway. My question is more in relation to why are you confident that this level of production is sustainable and maintainable beyond FY '24? Because -- but basically, the bulk of your FY '24 production rests on 3 buildings, right? Tower 1, Tower 2 at Barangaroo and Melbourne Quarter. That's a lot of it. All that rolls off and all of a sudden you're left with a potential hole in '25, right? How are you confident that this won't eventuate?

Again, a really good question. I mean just elaborating on that, I think we've got $59 billion worth of projects that we've got in conversions. And as I said, they've been acquired over the last 2 or 3 years, and we've had a slowdown in our international markets. So we're very focused on making sure we get those projects master planned. If we get all those projects master planned, what we would be anticipating is we continue to keep that run rate up. So it's very important for us to get our -- convert the converted projects to master plan projects to keep the production level. So ultimately, we'll keep giving the market visibility, but we think that's the right production level for the projects that we've got in our pipeline.

Our next question comes from Tom Bodor of UBS.

I was just interested, maybe back to Stuart's question, on capital requirements and maybe another way to discuss it is, on the investment slide, you talk about increasing your co-investment stake through 5%. What is the ideal co-investment position across your investment portfolio on new FUM?

Again, a great question, Tom. I think where we are -- depending on the type of FUM that we're creating. Normally when we're in a development phase, it's somewhere in between that 20% to 30% when we're doing it as a development product. If it's a new product where we're aiming to acquire assets would be in that 5% to 10%, would be what we'd be targeting. But on the develop to core, what we do aim to do is once we complete the project is then release that capital and reduce it back to that 5% to 10% target range.

So [ for passive ] buildings where the development is completed and it's stabilized, should still be at a long-term hold of circa 5% to 10%?

That's right, Tom.

Okay. And then the other question is around your pipeline, you specifically talk about Asia and Australia needing to sort of focus on originating pipeline. And I'd just be interested to know what opportunities you see out there and sort of how long you see it being from acquiring new projects to actually getting them through the sort of conversion and planning is ultimately delivering profit? Yes, and specifically what opportunities you see in Australia and Asia that you'd like to win?

Really good question, Tom. I mean I think it's one of the key focuses for the team, and it's probably something I'm going to sit down with our -- both Dale and Justin in the respective markets. We are working through the strategy of what we need to fill their pipeline because that is quite important as we feel that a number of key projects have been completed in those markets. And I think you did raise that August 16. So there are opportunities that we're starting to pursue across New South Wales, Victoria and Queensland. So there are some key things that we've identified that we would like to secure. And same in Asia, there's some projects that we've identified in markets like Singapore that we want to make sure that we secure over time. So again, we'll keep giving a bit more color. It's early days as we're sort of working through the strategies of that next wave of projects, Tom.