Lendlease Group (LLC) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Lendlease's 2023 Half Year Results Briefing. [Operator Instructions] I must advise you that this call is being recorded today, Monday, February 13, 2023. I would now like to hand the call over to Mr. Tony Lombardo, Global Chief Executive Officer. Thank you, Tony. Please go ahead.

Good morning, and thanks for joining the Lendlease 2023 Half Year Results Presentation. I'm Tony Lombardo, Global Chief Executive Officer and Managing Director of Lendlease. Joining me today is Simon Dixon, Global Chief Financial Officer. Sitting here at Barangaroo in Sydney, we're on the land of the Gadigal people, and I extend my respect to their elders' past and present. I'll provide an overview of our strategy and results and an update on our operations. Simon will then talk through the financial results, and I will finish with the outlook. We'll then open-up for questions. Turning now to our 5-year roadmap on slide 4. FY '23 marks the start of the 2-year Create phase of our 5-year Reset; Create; Thrive road map. The Reset phase, which you'd be familiar with from our prior updates, successfully recalibrated the business in FY '22 by reducing costs and streamlining management. Our focus is now on executing the strategy in order to return the group to sustained profitable performance. This includes growing funds under management to AUD 70 billion by FY '26 and achieving scale and development with more than AUD 8 billion of completions in FY '24 and maintaining execution excellence in construction. We'll also continue to progress our ESG targets and importantly, invest in our people. Moving now to the key achievements for the half '23. Against a challenging global business environment, we made steady progress in the first half. Growth in funds under management was underpinned by a new office partnership in London and asset acquisitions for our value-added Real Estate Partners 4 fund in Australia. We partnered with QuadReal to launch our first residential for rent building in Australia at Brisbane Showgrounds. The apartment building provides 443 units for rent and is expected to be complete in FY '25. Our global workplace assets comprise more than AUD 25 billion in funds under management and are 95% occupied. This reflects our leadership in delivering and managing modern, sustainable places and precincts. More than 50% of our product from our urban development pipeline comprises workplace and residential for-rent assets in prime locations, right for attracting investment partners and contributing to funds growth. In the Development segment, we added the iconic Sydney Harbor project, One Circular Quay to our pipeline. The AUD 3.1 billion project, a joint venture with Mitsubishi Estate, comprises 158 apartments for sale and a luxury 220-room hotel. During the half, we completed AUD 2.8 billion of projects, including Sydney's tallest building Salesforce Tower at Sydney Place. We commenced AUD 2 billion of projects, including 30 Van Ness in San Francisco, which has been rebranded to Hayes Point. The team in Asia achieved strong leasing results at Kuala Lumpur, The Exchange TRX. As of today, the project is approximately 80% pre-leased to dynamic array of tenants, including iconic flagship stores set to open in FY '24. We secured leasing at Blue and William in North Sydney with Equifax taking a-third of the building. We're also seeing strong sales momentum from our Sydney residential portfolio. Following the topping out of One Sydney Harbor Residences One and the continued construction of residences to and Watermans Residences, the buildings are collectively 88% pre-sold, representing approximately AUD 3.8 billion in sales. The new One Circular Quay Residential Tower, which is due to commence in the second half of FY '23 is already 30% pre-sold, representing approximately AUD 800 million in sales. In the Construction segment, we continue to do a good job managing supply chain and inflationary risks and delivered a steady result, given the challenging backdrop. Backlog revenue remained solid at AUD 9.6 billion, and the business is also preferred for AUD 9.8 billion of projects. As always, getting our people home safely each day remains our highest priority. Tragically, a sub-contractor in New York lost his life at a work zone under subcontractor management. Our thoughts are with the worker's family, friends and colleagues and everyone impacted by this tragic event. Improvements have been made across our key safety indicators, which are at record performance levels. Being a leader in sustainability has always been a strategic differentiator for Lendlease, and it continues to be. The most recent global real estate sustainability benchmark, Lendlease topped the global ranking for the world's most sustainable office fund. In addition, 3 of our funds were in the global top 10. We also published extensive portfolio data through the launch of an expanded ESG data book, which reports our progress towards eliminating Scope 1, 2 and 3 emissions. Our people continue to be the backbone of Lendlease, bringing our purpose and culture to life. We've launched a number of employee programs, including the relaunch of our flagship Springboard program and programs focused on gender and racial equity. Now moving to our financial performance on slide 6. The group recorded core operating profit after-tax of AUD 105 million for the period. This was up substantially from AUD 28 million reported in the same period last year and highlights that our strategy to reset the business is now contributing to more sustainable operating performance. Core operating earnings per security was AUD 0.152 with a return on equity of 3.1%. The interim distribution of AUD 0.049 per security is paid from the trust and represents a payout ratio of 32%. Disappointingly, we recorded a statutory loss after tax of AUD 141 million after being required to take a provision of AUD 200 million against potential liabilities for U.K. residential building remediation. This is before anticipated recoveries from third parties, including insurances and supply chain. This is a consequence of retrospective action by the U.K. government, requiring developers to commit to remediate residential buildings looking back 30 years. The liability relates to buildings primarily developed by Crosby entities, which were acquired by Lendlease in 2005, including buildings completed or in construction prior to the acquisition. I'd note there have been no formal claims directed to Lendlease in relation to this matter, however, the government department dealing with building remediation has received claims relating to some buildings in the Crosby portfolio. We remain in dialogue with the U.K. government on this matter. It is expected any cash expenditure relating to the provision would be spread across a period of at least 5 years. This expense has been excluded from core operating profit. I want to emphasize this has no impact on core operating profit or our target operating metrics. In a challenging environment, good progress has been made against most of our key operating metrics. Funds and assets under management as well as the directly held investment portfolio all increased. Work-in-Progress at AUD 18 billion is in line with the prior period. Completions were up and the development pipeline increased to AUD 121 billion with the addition of One Circular Quay. Construction revenue was higher, while new work secured was marginally below the prior corresponding period with lower origination in Australia. Backlog revenue remained solid, consistent with our objective of maintaining at approximately AUD 10 billion. Globally, we managed AUD 48 billion for investment partners across 40 funds and mandates. The projects listed represent our 21 major urban projects, each with an estimated development and value of more than AUD 1 billion. Our construction capability provides the delivery capability for our integrated model as well as design, project management and construction services to our external customers. Turning now to each of the operating segments in more detail. Beginning with investments on slide 9. Funds and assets under management are the key operating metrics that drive our management earnings. We are targeting funds under management of greater than AUD 70 billion by FY '26. The product created from our development pipeline is expected to be the primary contributor to this target as well as investing alongside partners in our existing funds and the launch of new products. The 8% first half growth in funds under management was driven by a new office partnership with existing investment partner, TCorp and a Japanese institutional investor, which acquired 21 Moorfields in London. The premium grade office development will complete in the second half of FY '23 and is 100% leased on a 25-year term to Deutsche Bank. Our value-add Real Estate Partners 4 fund, which was launched in FY '22, acquired 3 commercial assets in Melbourne and Perth. The fund is now 75% allocated. The group's urban development pipeline has AUD 60 billion of investment product embedded within it, including AUD 27 billion in each of workplace and residential for rent sectors. Our focus is to work with our investment partners to realize these assets and grow funds under management. Assets under management have increased on the back of the 21 Moorfields acquisition and the completion of our residential for rent building Cascade at Lakeshore East. After completing in FY '22, Cascade is now 96% leased and strengthens our portfolio in the US. Moving to our investment portfolio on slide 10. Our strategy is to become an investment-led business by reweighting the group's capital to more stable and recurring income streams. Our target is to have 60% of our group's invested capital in the Investment segment by FY '26. This includes retaining a large proportion of completed assets from the development pipeline to demonstrate alignment as required and investing alongside our partners in new products such as 21 Moorfields. The significant driver in earnings for this half came from the investment partner acquiring part of the asset management income stream from the mature U.S. military housing portfolio. The group's investment portfolio of AUD 4.2 billion is well diversified across workplace, residential, retail, data centers and industrial. Moving now to the Development segment on slide 11. Work in progress, the lead indicator for future completions is steady at AUD 18 billion. Approximately AUD 4 billion of completions are targeted for FY '23. In FY '24, we expect a substantial upward trajectory in completions to greater than AUD 8 billion. Projects underpinning this include Tower 1, One Sydney Harbor, the Melbourne Quarter Tower, and the Exchange TRX in Kuala Lumpur. While lot sales in Australian Communities business were subdued at 766 reflecting current high interest rates and inflationary pressures, strong margins were achieved. As a result of production issues and weather-related delays, FY '23 settlements are anticipated to be below the annual target of 3,000 plus. The conversion of our existing pipeline is key to achieving the AUD 8 billion of annual completion in future years. One Circular Quay is already master plan and due to commence in the second half of FY '23. Elsewhere, we've progressed planning at a number of key pipeline projects, thereby moving them closer to the master plan phase. At Silvertown, a planning application has been submitted for the first phase of the project following extensive consultation with local residents and businesses. This will include approximately 1,250 new homes as well as affordable homes and approximately 82,000 square meters of commercial space. In Birmingham, designed for the regeneration of Smithfield have been submitted to the City Council. If approved, 600 sustainable homes will be delivered in a green setting as part of the first phase of work with around 3,000 homes planned for the whole site over the coming years. We anticipate AUD 6 billion of commencements in the second half of FY '23. Moving now to the Construction segment on slide 13. Our construction capability remains a key component of our integrated model and the delivery of our urban projects. The Australian region is expected to be the main contributor to earnings. It is a strong workbook with AUD 6 billion in backlog revenue. The U.S. has backlog revenue of AUD 2.9 billion below historical levels, primarily due to a pause in projects coming to market during the pandemic and selective bidding on new work. The significant increase in new work secured for the period underpins confidence that the backlog in revenue will recover. The overall business is preferred for AUD 9.8 billion in new projects, including AUD 4.1 billion of social infrastructure and AUD 3.7 billion of office projects. I'll now hand over to Simon to talk through the financials.

Thanks, Tony, and Good morning, everyone. Turning now to our financial performance on slide 15. Core segment EBITDA of AUD 354 million was up 34%, supported by higher contributions from the investments and development segments. The Investments segment delivered EBITDA of AUD 197 million, up 40%. Investment portfolio EBITDA was AUD 140 million, up from AUD 82 million. Asset level performance was subdued with an annualized investment yield of 3.3% across the portfolio, down from 4%. This was partially due to the denominator effect of assets under development, including 21 Moorfields, which is not expected to contribute to income until the second half of FY '23. Profit included AUD 54 million from the disposal of a further 13% of the asset management income stream of the U.S. military housing portfolio. Funds Management EBITDA was AUD 37 million, down from AUD 40 million. Revenue increases driven by base fees growing in line with higher funds under management were more than offset by higher expenses due to additional headcount hires to support growth in FUM and the launch of new products. This has impacted margins in the current period ahead of expected growth in revenue. Asset Management EBITDA was AUD 20 million. Revenue was higher with improved retail leasing activity in Asia, offsetting the decline in U.S. military housing residential management earnings following the partial sell-down. The Development segment delivered EBITDA of AUD 89 million, up from AUD 39 million, driven by an improved contribution from the Australian Communities business. There were AUD 2.8 billion of completions during the period, including AUD 2.5 billion from the urban portfolio and AUD 300 million in communities compared with AUD 200 million in the prior corresponding period. The Australian communities business generated AUD 32 million compared with a loss of AUD 6 million. While settlements more than doubled from the prior corresponding period to 1022, the result was hampered by production issues and weather-related delays. More than AUD 1 billion of presales will carry into the FY '24 financial year. Construction delivered EBITDA of AUD 68 million, down from AUD 84 million. The result was impacted by a settlement of a claim in the past non-residential project in the U.K. dating back to 2015. This has given rise to an EBITDA margin of 1.8%. Excluding this claim, the EBITDA margin would have been 2.3%. Corporate costs of AUD 76 million were 25% lower, reflecting savings achieved during the FY '22 reset phase. We expect to be able to maintain these savings, and we'll continue to optimize the business through disciplined cost management. Net finance costs were lower despite the rise in interest rates with savings on canceled committed facilities and higher interest income, more than offsetting a modest increase in interest expense in the period, assisted by well-positioned hedging strategy with the majority of our drawn facilities on fixed rates. Core operating profit after tax recovered significantly on the prior corresponding period to AUD 105 million or AUD 0.152 per security. The group recorded a statutory loss after tax of AUD 141 million. This includes the AUD 200 million provision due to retrospective U.K. government action, a loss of AUD 39 million relating to property revaluations in the Investments segment and a non-core segment loss of AUD 7 million, reflecting overhead costs associated with managing the retained elements of the Engineering and Services business. Moving now to our portfolio management framework on slide 16. As most listening to this call would be aware we announced refinements to the PMF at our strategy presentation in November last year. I'll start by emphasizing the target returns across each of the operating segments and our gearing range were not changed. The amendments, which are highlighted on the slide were made to support and expedite our transition to becoming an investment-led organization to enhance capital efficiency and to retain more capital to provide funding capacity. Notably, we have lifted the invested capital target range for the Investments segment by 10 percentage points and reduced the development segment by the corresponding amount. Over-time, we expect capital allocation to be at the midpoint of these ranges, implying a 60%-40% allocation to investments development. The target EBITDA mix across the 3 operating segments shifts due to the change in capital allocation and the desire to maintain our construction revenue at current levels. Investments and development are targeted to each contribute 40% to 50% to earnings with construction reducing to 10%. A slight narrowing of the group ROE range to 8% to 10% is primarily due to the change in capital allocation between investments and development. To reflect being in a period of growth, the distribution policy has been revised to a payout ratio of 30% to 50% of core operating profit. Segment returns are measured against the targets in our PMF. However, at the FY '22 results presentation, we provided anticipated ranges for FY '23. First half return on invested capital of 7.1% for the Investments segment was within the anticipated FY '23 range of 6% to 7.5% and the segment target range of 6% to 9%. As previously noted, the return was lifted by the partial slowdown of the U.S. military housing asset management stream. The Development segment return on invested capital of 1.9% was below the lower end of the expected range for FY '23. A challenging macroeconomic environment and few urban completions had a negative impact on returns. The Construction EBITDA margin of 1.8% was within the anticipated FY '23 range of 1.5% to 2.5%, but was negatively impacted by the settlement in the U.K. Moving now to net debt on slide 17. The increase in net debt from AUD 1.1 billion at FY '22 to AUD 2.6 billion at the period-end includes investments growth of AUD 700 million, underpinned by the co-investment acquisition of 21 Moorfields and acquisitions by the Real Estate Partners 4 fund. It also includes development acquisitions and production spend of AUD 800 million on key projects, including One Circular Quay, which is anticipated to commence in the second half of FY '23, the Exchange TRX, which is anticipated to complete in FY '24, One Sydney Harbor, which is anticipated to complete in FY '24 and '25 and Hayes Point, which commenced this period. There are a number of capital recycling initiatives in progress, and we expect our full year net debt position to be at or near the midpoint of our target range. Now to the group's invested capital position on slide 18. Invested capital of AUD 9.7 billion has allocated AUD 4.4 billion to investments and AUD 5.9 billion to development. Other includes construction, which benefits from negative working capital and non-core, which comprises both provision balances and negative working capital. As previously flagged, capital will be increasingly directed towards co-investment positions in product derived from the development pipeline as well as new products and partnerships. Accordingly, investment segment capital is expected to climb to approximately AUD 7 billion by FY '26. We aim to operate a capital-light development model and currently, there is AUD 5.9 billion controlling our AUD 121 billion development pipeline. The AUD 700 million increase in the Development segment predominantly relates to production expenditure ahead of higher completions anticipated for FY '24, such as the projects I've just referred to on the previous slide. We are targeting a reduction in development in invested capital to approximately AUD 5 billion by FY '26. This will be facilitated by our number of capital recycling initiatives, including introducing a joint venture partner for our Australian Communities business and partnering or introducing capital earlier in the development cycle on projects. Over-time, we'll be working to rebalance the regional capital mix, targeting to increase the allocation to Australia to 40% to 60%. From a treasury management perspective, the balance sheet remains in a strong position with gearing at 16.8%. As highlighted at the FY '22 results presentation, gearing was expected to rise to the midpoint of the target 10% to 20% range during FY '23. The group remains in a strong liquidity position with AUD 2.4 billion of available liquidity. The average drawn debt maturity remains greater than 5 years, providing the group with access to longer-term capital. The group continues to diversify its sources of financing and has extended a number of bank facilities. The proportion of the group's total facilities that are sustainable, financings has increased to 74% from 60%. Investment-grade credit ratings continue to form an important component of our financial strategy, and these were recently reaffirmed. We continue to focus on growing our balance sheet profitably, gearing remains a focus and as noted, we expect to continue to be at or near the midpoint of the range for the full year. I'll now hand back to Tony.

Thanks, Simon. Moving now to the outlook on slide 21. We've now entered the 2-year Create phase of our 5-year road map, well positioned to deliver improved operating returns. As Simon noted, there are several initiatives underway to optimize the portfolio and recycle capital. While we expect better performance in the second half, current market risks, including inflation and interest rates, continue to temper the pace of recovery. We continue to target a return on equity of 8% to 10% by FY '24. Our core operating earnings are expected to improve in the second half. However, as indicated at our strategy update in November last year, return on margin outcomes for the 3 operating segments will be challenged. We expect the investments ROIC to be at the lower end of the anticipated FY '23 range, reflecting the subdued market outlook and portfolio returns impacted by higher funding costs. The ROIC for the Development segment is anticipated to be at the lower end of the expected range of 4% to 6% for FY '23 and well below the target range of 10% to 13% with few completions. The segment is also still in a transition phase where profitability is subdued due to the change in approach to joint venture partnerships, which has shifted the timing of profit recognition. The EBITDA margin for the Construction segment is expected to be in the range of 1.5% to 2.5% for FY '23 and potentially lower than the target range of 2% to 3%. This is due to cost pressures and supply chain constraints. While these risks continue to be proactively managed, their persistence may impact performance. Accelerating our transition to being an investment-led company is our priority. The high-quality and sustainable product from our development pipeline will be a key driver of funds growth to more than AUD 70 billion by FY '26. We'll now open-up to questions.

[Operator Instructions] Your first question comes from Sholto Maconochie from Jefferies.

Just a quick one on, maybe a nuance in the wording. But on the outlook, it said FY '24 target of 8% to 10%. Before I think you said a bit low end of that range, has that changed at all to be at the low end of that range or is it going to increase?

I think it's the same as we've previously stated, Sholto. The only things we adjusted at November was really around FY '23 to say that returns across those 3 segments were at the lower. We still feel we're tracking quite well to achieve our ROE target of the 8% to 10% target range in 2024.

And then just on the gearing, like, if you look at the profile, got completing about AUD 1 billion that you'll help and then be starting AUD 6 billion, I know that the CapEx spend is sort of back ended, but what sort of capital management issues are you looking at to ticket that gearing down? Is that interesting a capital partner to communities or what we sort of anticipate to get that down over the next sort of one to 2 years?

I think we've been calling out that we will be at that midpoint. And as we've stated, I think Simon did flag that we are looking for recycling initiatives around communities that we are looking to bring a JV partner into the portfolio. I mean we will look towards using, again, organically sourced capital by recycling certain investments we have and we still got some capacity around net debt, and then we'll assume we'll be using some retained earnings. So we've flagged to the market for some time that through '23, '24 we will be at that midpoint to elevated level as we've ramped up production across the board, and we are tracking to achieve that AUD 8 billion of completions in '24, which has meant we've had to use additional capital, of course, to get to that point and some of that capital starts to recycle and complete, especially the big towers on One Sydney Harbor, 1 and 2.

And then now what was the TRX contribution in this period?

Sorry, just if I can add to that. I mean, just to kind of reiterate that sort of looking forward in our business plan, we remain comfortable that very much organic capital generation does fund the business plan. So to be very clear, that's the mixture of retained earnings, incremental net debt as our metrics improve in the coming years and also realizing assets currently on the balance sheet over and above their balance sheet value. So taking all of that into account, and some of that does include capital recycling. Tony has called out the communities business. There remains a number of other capital recycling initiatives that are in progress that we won't go into detail about. But taking all of that into the mix, we're comfortable with where net debt is currently sitting, and we're comfortable to make the statement that we expect net debt to be sort of at or near that sort of midpoint of the target range as we approach the end of FY '23.

And then on the TRX, how much did that contribute in the profit this half?

I think it was around that AUD 15 million, AUD 16 million.

On the EBITDA line.

Okay. And then just on the U.S. apartments, in September, I think Lakeshore was sort of about 23% presold. I mean, mortgage rates are up a bit, how is the presales on that project on the Lakeshore is condo?

Yes. I think like shows at that sort of level at this point. I think where we see just the market with interest rates, I would say the condo markets have been a bit more subdued. But again, that project is in partnership in Lendlease has about a 42.5% equity interest in that project.

And then just finally, just on the business in the US, construction business any change post new management there that you'll look to sort of lower the exposure to certain markets in the U.S. to reduce costs there and just focus on your core strengths in that market?

Yes. I think Claire has been in the role just coming up to 90 days. So we are just looking at where the U.S. adds in strategy and so a large part of the future of that business is around the delivery of the Google projects and working closely with our key customer there. So Claire just working through that to Sholto what I intend to do is as we get to the full year, we'll give a bit of an update on where we see all the different businesses moving.

Does the Google's decision to -- I know the project has got different milestones with the office sort of has to start for the resi, but there's some nuances with the resi can start a drop-dead. Does that impact the timing of the Google project with the apartment side of things that Lendlease is doing with sort of job market that Google sort of outlined in the last few weeks?

I think the key for us and working with Google was first to get all the 4 projects master plan. So pleasingly, we've done that on San Jose and Middlefield. The team is very focused now to get the master planning for both North Bay Shore and Moffett Park complete. And so we're working very closely there. The key for those projects has always been to deliver build to rent and build to sale products because there's a real shortage of residential product in Silicon Valley. So we are working very closely with Google on sequencing and timing and working when we first launched which projects. So still more work to be done. I think as the market slowed for a lot of different players and their needs for real estate are changing, we are just starting to work with our customer and work out the best sequencing and timing for all the 4 projects.

Your next question comes from James Druce from CLSA.

Just following on from Sholto's question. Can you say that gearing will be lower second half than it was first half? Is that the message that we're hearing.

No. I think the message you're hearing is we expect gearing to be sort of at or near the midpoint of the range for the full year, which it was at the interim effectively. So I'm not expecting net debt to substantially increase, but we're guiding towards that sort of at or near the midpoint of the range. So we've got a range of 10% to 20%. We're at 16.8% for the half. Exactly where we land in terms of if we can sort of bring it down lower will be partially dependent on some of these capital recycling initiatives, which may slip into the following year, which may occur this year. But without those, I'm very comfortable with saying that we believe that the net debt will land at or near the midpoint of our target range and that's not taking into account some of these larger capital recycling initiatives that we're talking about. If some of those were to land pre 30 June, then clearly, that would bring down the level of net debt potentially quite substantially.

Just on the Barangaroo resi towers, you sort of mentioned that it is in '24, '25, is that a late '24 story in terms of the completions?

No. We are still on track as planned. We topped out on Tower 1. We're 88% sold across all 3 towers, and they're on track for their completion. They will complete around the middle part of FY '24.

Okay. So it could be first half or more like this is medium end?

It will be in the second half of the FY '24 year when that first tower completes.

And then just on Melbourne Metro. I think you sort of drew-down maybe AUD 100 million on the provision. What was the drawdown? And what is the run rate of cash outflow for the next couple of halves, do you think?

Yes, I've got that number for you. I'm going to circle back. I've got a number in my mind, which is different than what the team is showing me. I do have that. So I'll come back to you after the next question and then cover that one off.

Your next question comes from Simon Chan from Morgan Stanley.

First question is just on the Google project. I've noticed that the end value of Google project got marked up by AUD 1.5 billion to AUD 21.8 billion now. What's changed there?

I think the predominant thing there would be more exchange rate just in terms of how we're converting. But I think we're holding that project and working through with Google just on the scale of what we're doing overall.

Yes. So FX, it's pretty big movement just for FX. But my next question, you guys mentioned capital-light several times in the presentation. Obviously, to execute that strategy, you're going to need capital partners across various projects. Just wondering if you can give us for a feel as to how things are going at Van Ness, also your strategy in terms of capital liberation at TRX and potentially bringing someone new in that One Circular. Can you just help on how's discussions going with potential interested parties?

I mean, the new One Circular Quay, we've already brought in Mitsubishi Estate for 66% of the project and that's what we mean by being capital-light. That project we secured Mitsubishi upfront as our partner to deliver that project. So Lendlease has taken on a third of that project. At TRX, we've always said, once we get to a position that the asset gets completed in the early phase of stabilization, then we'll look to realize value and we'll work with the right partners. And I know the team are talking to both local and international capital on that. Van Ness, we have just kicked off the development there, and we'll look to bring in a capital partner over the next sort of 12, 24 months at the right time. So I think like everything we're doing, we're flagging, we're moving to more of a capital light with some of the projects that we are putting in delivery. As you know, with IQL in the U.K., we brought in the Canadian pension fund to deliver the first 3 buildings. On MIND, same thing, we bought in the Canadian pension fund on 60 guests we brought in Ivanhoe Cambridge to partner on that, and they're 75%. So you can see a fundamental shift over the last 18 months and how we execute and fund the projects requiring less unleased capital and bringing more of our capital partners alongside us earlier in the development.

Can I ask a question on the Chicago sales bank. The office components seem to have disappeared, they're replaced by more resi, replaced by a much bigger resi component. Can you perhaps talk through the rationale there? And also if this similar strategy could be rolled out across some of your other projects where you scrap the office and put more into residential?

I think we look at all our projects over-time, and we're looking at the best way to optimize and look at the market demand for different products and determine what's the best and suitable best use for that project. So on that, where we've seen softer demand on commercial space, we do see elevated demand for build-to-rent product. So we do have a preference to really push that product going forward. So the team, again, there's always planning restrictions and requirements that we need to follow within our master plan envelopes. But where possible, we are looking to optimize and focus on all build to rent going forward.

Just my final question, this one, Tony. Your investment yield is 3.3%, it's rather low. And I know Simon Dixon in his presentation explained on the denominator effect of Moorfields. What would the investment yield be like on an underlying basis, will it be closer to 5% where it was pre-COVID or like is there still a drag due to whatever reason?

Yes. Look, I think, I mean we'll come back with the actual detail. But Simon is right, we did put a significant investment into Moorfields for the period where that asset is not yielding at this point, and we flagged that, that asset will complete, but it's 100% leased to Deutsche Bank. So that is part of it. I mean, as we've repositioned and reconstituted that portfolio, we've got different assets in different markets around the world that earn different yields. So for instance, PLQ assets in Singapore earned closer to that 3% to 3.25% yield because it's just that's the market there in Singapore in terms of the office assets do have that lower yield. We've got other assets that at the higher level, what we are trying to do is get a blended portfolio to circa 4.5% over-time.

If I can just add to that, Simon, if you kind of adjust the denominator effect for some of these early-stage assets, then you're looking more like 4%. So we need to keep sort of working to push that up over-time.

Yes. I mean before COVID it was always averaging 5%, right? And then COVID hit, you guys blame them on rent collection and all that, which was understandable. It just seems to struggle to get back up to the pre-COVID level and hence my concern.

I think part of it is due to portfolio composition of pointing out. And part of it is, as you've got development, it does take a little bit more time for those assets to stabilize and generate that right yield. So some of the assets that complete can take anywhere from 18 to 24 months to stabilize.

Your next question comes from Stuart McLean with Macquarie.

Just continuing on looking at the investment portfolio there and the margins in funds management seems to have come down to 40% from 50%, asset Management margins a little bit down and maybe just AUD 20 million of cost has gone in versus the PCP annualized. Like are we now at a run rate on that cost increase coming through the investments and just that drag that we're seeing in this half performance or do you need to continue to invest in people and costs there?

No, I think we flagged at the Strategy Day again. I think I flagged that the margin was going to be at that 40% as we're making some investments into the global team. So we have brought in new people to the business in Australia, Europe, and we are intending to bring some talent into U.S. platform. So we see that margins will be at that sort of level over this next sort of 12, 18 month period as we're growing out the team. And so we had flagged that, I would say, still back in November when we had the Strategy Day.

Okay. So stay around 40%. And then do you expect growth from there and where do you want to get to maybe by FY '26 and you have that AUD 70 billion of fund, where would you like to see that.

I think where we want to be by 26%, we're targeting to get our margins back into that 50% range is where we'll be striving to because we will have built up a team that it's about growth and being able to scale up that workforce over the next few years.

Second question is just around the AUD 6 billion commitment in the second half. Appreciate circa AUD 3 billion from One Circular Quay. Can you just discuss maybe the other AUD 3 billion and how much the LA project is of that other AUD 3 billion?

Yes. I think is the other big one there. And I think, circa from memory, that's about AUD 1 billion and a bit, but I'll come back with the exact number. And so we can give you some more detail on the rest because it's made up of a number of other smaller projects.

Okay. And then what sort of conditions do you need to see to that L.A. project to commence. Is capital there at the moment either tenant or vice versa or just what are you looking at there to start that, would you start on expect basis? Any detail there would be great.