Half Year 2021 LendLease Group Earnings Presentation Millers Point, New South Wales Feb 22, 2021 (Thomson StreetEvents) — Edited Transcript of LendLease Group earnings conference call or presentation Sunday, February 21, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Frank R. Krile Lendlease Group – Interim Group CFO * Stephen B. McCann Lendlease Group – Group CEO, MD & Executive Director ================================================================================ Conference Call Participants ================================================================================ * James Druce CLSA Limited, Research Division – Research Analyst * Peter Zuk Crédit Suisse AG, Research Division – Director * Richard Barry Jones JPMorgan Chase & Co, Research Division – VP * Sameer Chopra BofA Securities, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research * Sholto Maconochie Jefferies LLC, Research Division – Equity Analyst * Simon Chan Morgan Stanley, Research Division – VP & Equity Analyst * Stuart McLean Macquarie Research – Research Analyst * Tom Bodor UBS Investment Bank, Research Division – Director ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Thank you for standing by, and welcome to the Lendlease 2021 Half Year Results Teleconference. (Operator Instructions) I would now like to hand the conference to — over to Mr. Steve McCann, CFO (sic) [CEO]. Please go ahead. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Good morning, and welcome to the Lendlease 2021 half year results presentation. My name is Steve McCann, Group Chief Executive Officer and Managing Director of Lendlease. Sitting here at Barangaroo in Sydney, I acknowledge we’re on the land of the Gadigal people and extend my respects to their elders past, present and emerging. Joining me today is Frank Krile, Acting Group Chief Financial Officer. I’ll provide an overview of Lendlease’s results for the half year ended 31 December 2020. I’ll then hand over to Frank, who will talk through the financial results before I provide an update on our operations and outlook. We’ll then be available to take questions. Moving now to Slide 4. Our vision for the future of urban development is tied to our purpose as an organization. Our purpose statement articulates why we do what we do. It acknowledges our rich history and leadership in placemaking that encompasses the value we create in partnership with others. Stakeholders, including governments, investors, customers and the communities within which we operate, are increasingly looking for organizations to demonstrate how they contribute to society beyond a pure profit motive. Our strategy for the next decade aims to bring our purpose to life by employing our placemaking expertise and integrated business model in global gateway cities to deliver urbanization projects and investments that generate social, environmental and economic value. Turning to our first and most important priority, health and safety, on Slide 5. We introduced global minimum requirements in 2008 to provide a consistent standard and operating discipline that defines the Lendlease way for managing health and safety. The application of these standards has been reflected in an improved safety performance across the past decade. Our safety culture has transitioned to an holistic culture of care. This encompasses the way we engage with our workforce, the facilities we provide and the planning we put in place to eliminate risks. Notwithstanding this, tragically, 2 people lost their lives in Lendlease projects during the period. In October, a roof collapsed at Curtin University in Perth, Western Australia, resulted in the death of Jonnie Hartshorn. And in November last year, [Philip Matthew] was fatally injured at the Setia City Mall phase 2 project in Malaysia. We extend our deepest condolences to the men’s families, friends and colleagues for their tragic loss. We will continue to strive as an organization to eliminate incident and injury everywhere we operate. Moving to Slide 6. Lendlease has always had a strong social ethos when it comes to delivering sustainable places and practices. For more than 60 years, we have built our reputation as a company that creates value by doing what matters and being bold in our thinking. We announced 2 intentionally ambitious sustainability targets during half year ’21. The environmental target sets a global benchmark for our sector, and we are making a conscious decision to be a leader in driving industry transformation to limit global warming and to create lasting social value. The group has made progress towards its scope 1 and 2 carbon target, with APPF Commercial being certified carbon-neutral scope 1 and 2 by Climate Active, an Australian government-backed initiative to drive climate action. We’ve also made progress towards achieving our scope 3 carbon target by becoming a founding member of SteelZero, a global initiative driving market demand for net 0 carbon steel. This initiative will see us work alongside suppliers to support transformation in steel manufacturing. From a social sustainability perspective, we have shared value partnerships across our regions. We are focused on creating measurable socioeconomic value by addressing the social needs of communities. Our shared value partnerships will be evaluated through a combination of social valuation methodologies utilizing independent consultants to measure the full extent of value created. Lendlease launched its second Elevate Reconciliation Action Plan. It outlines our commitment to First Nations peoples, acknowledging their unbroken connection to country, creating respectful relationships that provide opportunities for equal social and economic outcomes. The group also published its first global modern slavery statement, which sets out actions taken to assess and address our modern slavery risks. Turning now to the group result on Slide 7. The group recorded core operating profit after tax of $205 million. Core operating earnings per security was $0.298, with a return on equity of 5.9%, below the target range as COVID-19 continued to adversely affect performance. The distribution per security was $0.15, representing a payout ratio of 50% of core operating profit. The group statutory profit after tax was $196 million. This included a loss of $2 million for the noncore segment and a loss of $7 million from property revaluations in the Investments segment. Significant progress was made on the strategic priorities outlined at the market briefing in August last year. That involves better leveraging our competitive edge by focusing on expanding and upweighting those parts of the group that have the greatest potential to drive securityholder value. Investment partner initiatives were progressed, with development joint ventures established across 3 urbanization projects, including the group’s first urbanization project in Los Angeles. The group has displayed resilience through a very testing period, with the recovery in operating conditions gathering momentum towards pre COVID-19 levels. Core operating EBITDA was $405 million, a significant improvement from the second half of FY ’20, although lower than the $525 million reported in half year ’20. At a segment level, progress was made on converting the Development pipeline into work in progress, including new investment partnerships in residential product commencing delivery in 3 gateway cities. The Construction segment delivered a solid result, as the business rebounded from the significant disruptions experienced in the second half of FY ’20. Notwithstanding softer revenue, the EBITDA margin came in at the top end of the target range. The portfolio performed well, aided by cost management and projects either nearing or reaching completion. The Investments segment recovered from the worst effects of the pandemic, although returns remained below target. The strong financial position of the group provides the capacity to accelerate development towards the group’s target of more than $8 billion of production and take advantage of new investment opportunities. Turning now to Slide 8. The most pleasing aspect of the result was the substantial headway the group made on its strategic priorities. At the strategy update in August last year, we committed to prioritizing our capital and people resources towards the areas of potential highest return in our Development and Investments portfolios. We made significant progress on the exit of the noncore segment. The sale of the Engineering business to Acciona completed on 9 September 2020. We were also successful in redirecting resources towards areas where our competitive edge is strong by divesting the US Telecommunications and Energy development businesses. Post balance date, the group made further progress in realigning its exposure to the retirement sector with Aware Super acquiring a 25% interest in the Retirement Living business at book value. The capital from these divestments will be redeployed into other opportunities aligned with the group’s strategic priorities. The weaker market environment has provided an opportunity to secure new urbanization projects alongside investment partners on attractive terms. 1 Java Street in New York will transform a city block into apartments for rent, while La Cienega Boulevard, our first urbanization project in Los Angeles, will include a mix of apartments for rent and office space. These projects also will support the growth of the Investments platform. The team in Europe is nearing financial close on Birmingham Smithfield with the Birmingham City Council recently approving the joint venture agreement. It is another fantastic regeneration scheme that will add almost $3 billion to the Development pipeline. I’ll now hand over to Frank. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Thanks, Steve. And good morning, everyone. Turning to our financial performance on Slide 10. While core segment operating EBITDA was down 21% to $469 million, it has improved significantly from $126 million in the second half of FY ’20 as operating performance of the group recovers towards pre COVID-19 levels. The chart illustrates the extent of the recovery we have achieved across all 3 core operating segments from the second half of FY ’20. Development EBITDA is up from $50 million to $244 million. Construction has recovered from a break-even position to $104 million, and Investments increased from $76 million to $121 million. Now to each of the segments in more detail and using half year ’20 as the comparative period. Development EBITDA declined by 10%. The establishment of a partnership to deliver the first residential tower at One Sydney Harbour Barangaroo South contributed $147 million to EBITDA. Pre-sales are now approximately 85% by value, including contracts under negotiation. The team is also making good progress on delivery, with the lift core approaching the 30th floor. There were 440 apartments for sale settlements, with 2 projects accounting for the majority: The East Tower at Melbourne Quarter and 3 buildings at Elephant Park in London. 2 of the buildings at Elephant Park form part of the affordable housing component of the project and therefore generated lower margin. We continued to provide some purchases with more time to complete settlements. In communities, there were 1,043 land lot settlements across the Australian portfolio, up 25% on the prior period. The Construction segment delivered EBITDA of $104 million, up 3%. The pace of the recovery has been somewhat stronger than we had initially anticipated. Cost management following the onset of COVID-19 has enabled the business to adjust to lower revenues. Combined with some benefit from projects either nearing or reaching completion in the period, the EBITDA margin rose to 3%. The Investments segment delivered EBITDA of $121 million, down 46%. Management EBITDA was adversely impacted by reduced asset management fees predominantly related to the retail sector. The prior period also benefited from higher performance fees, with a substantial performance fee earned in half year ’20 relating to the completion of Paya Lebar Quarter in Singapore. While the group’s investment portfolio is well diversified, returns from the Retirement Living business and the group’s retail investments were both lower. Corporate costs of $64 million include group services costs of $54 million, which were down 4%, reflecting disciplined cost management. The remaining amount relates to treasury costs of $10 million, which were also lower. Net finance costs of $67 million were down 12% due to lower average net debt and marginally lower cost of debt. The effective tax rate for core operating earnings was 22%, towards the lower end of the 20% to 30% target — 20% to 30% range that we expect for the full year. As outlined by Steve, the core operating profit after tax was $205 million, down 26% on the prior period. The larger decline in core operating earnings per security reflects the additional securities on issue following the capital raising towards the latter part of FY ’20. This is the first period we have reported operating profit metrics, which provide the group’s view on the underlying operating result. Statutory profit after tax for the period was $196 million, which included a loss of $2 million for the noncore segment and a loss of $7 million from property revaluations in the Investments segment. Moving now to Slide 11. The chart provides an overview of the major movements in net cash flow during the period. We commenced the financial year with $1.6 billion in cash. This included the working capital cash on the projects that formed part of the sale of the Engineering business in the period. Underlying operating cash outflow was $735 million. This included an approximate $200 million operating cash outflow from the noncore segment primarily attributable to the retained projects. The establishment of the development joint venture at One Sydney Harbour resulted in an approximate $500 million decrease in the underlying operating cash flow and an equivalent increase in the underlying investing cash flow. This largely offsets the operating cash inflow on the project associated with the $588 million of PLLACes proceeds received in the second half of FY ’20. Underlying investing cash outflow was $161 million. The group continued to invest across a range of urbanization projects. Investing cash inflow included proceeds from the sale of the US Telecommunications business. The largest source of investing cash outflow was the sale of the Engineering business, with the first installment of the sale proceeds more than offset by the final $411 million in working capital cash balance transferred to the buyer. Only $40 million of the sale proceeds were received in the period, with approximately $100 million in additional proceeds already received post balance date and the remaining $60 million also due in the current half. Net cash inflow from financing activities was $366 million, with other adjustments of $9 million included in the total inflow of $375 million. We closed the period with a cash balance of $0.9 billion. Turning now to Slide 12. The group measures underlying operating cash flow to enable an assessment of cash conversion against group operating EBITDA. The measure is derived by adjusting statutory cash flows, with the largest adjustment relating to the impact from Investments and Development. Analyzing this metric over an extended time frame removes the impact of anomalies in a particular period such as what we have in the current period and provides a normalized view. Looking back over the last 5 years, our cash conversion has averaged 86% over this period. Looking now to the group’s financial position on Slide 13. The group remains in a strong financial position with gearing of 12.9%, at the lower end of our 10% to 20% target range. The rise in net debt to $1.8 billion reflects the cash flow movements discussed on the earlier slide. They include the underlying operating cash outflow, the impacts of the Engineering sale and other divestment receipts and additional investment into the Development pipeline. The $0.6 billion rise in invested capital to $8.8 billion reflects a $0.2 billion increase in Development capital, with the remainder relating to Construction including the working capital movements previously discussed. Investment-grade credit ratings form an important component of our financial strategy. Following our strategy update last August and the subsequent completion of the sale of Engineering, Moody’s revised their rating outlook from negative to stable, citing the improvement in the group’s business profile and expected reduction in earnings volatility. And more recently, Fitch reaffirmed their rating with a stable outlook. The interest cover ratio improved to 6.7x. The average cost of debt reduced to 3.3%, and average debt maturity is now 4.3 years. With respect to funding, the group continued to diversify its sources of financing with the issue of a $500 million green bond, a first for the group and the largest green bond issued by an Australian nonfinancial corporate. The group’s liquidity position is $4.7 billion, including cash and cash equivalents of $0.9 billion. Turning now to our core operating business performance against the portfolio management framework targets on Slide 14. The returns and targets on the chart reflect the changes announced at our strategy update in August 2020. The revised return targets are derived from hurdle rates that have not been adjusted. The changes relate to the adoption of operating-based profit metrics combined with the target re-weighting to the Investments segment. This has led to a revised Investments ROIC target of 6% to 9% and a revised group return on equity target of 8% to 11%. Finally, the distribution payout policy is 40% to 60% of core operating profit. The average return on equity over the last 5 years was 8.8%, within the 8% to 11% target range. That reflects Development returns at the lower end of the target range, while Construction and Investments have delivered returns towards the midpoint of their respective target ranges. More recently, returns have been impacted by the pandemic. However, we believe we are well placed to drive an improvement in our returns as operating conditions continue to recover. I will now hand back to Steve for an operational update. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Thanks, Frank. Turning to Slide 16. Our real estate strategy of targeting key gateway cities has resulted in strong growth across the platform and provides an opportunity to extend the leadership position in creating urban precincts. Mapped here are our 22 major urbanization projects with an end development value of more than $1 billion, along with some of our key performance indicators across our operating segments. A lot of time and cost has been invested in building this footprint, which would be difficult to replicate. We then overlay this with the global systems, expertise, risk management and investment partner relationships. We expect this to drive superior returns as we accelerate the delivery of the pipeline. While there remains near-term uncertainty, we believe our gateway cities strategy that leverages both our placemaking skills and integrated business model is compelling. Our expectation is for gateway cities to experience disproportionately higher growth and attract disproportionately higher investment in real assets. Moving to the Development segment on Slide 17 and focusing on the operational performance. Our Development pipeline now stands at $110 billion, of which $12.2 billion is currently work in progress. The growth in the secured pipeline, along with the achievement of planning milestones and detailed analysis of both market absorption and investment partner appetite, gives us the confidence to target more than $8 billion of production per annum. However, the lag between origination of a project and planning approval is often up to 3 years, and approximately half of the $110 billion Development pipeline has been secured within that time frame. Production of $1.8 billion in half year ’21 includes the completion of the Two Melbourne Quarter office tower, residential apartments for sale in Melbourne and London, a residential for-rent building in Chicago and the land lot settlements in Australia. The lands I referred to have given the business time to plan ahead. To that end, the emphasis for the business in more recent times has shifted from origination to execution. We’ve been investing heavily in recent years to build a global capability, and we are confident that our global operating model will facilitate execution at scale. The model provides a framework for consistency in approach and the adoption of best practice while empowering our project directors and teams to lead and innovate. They are then supplemented by a range of systems that provide a strong governance and support framework from safety and sustainability, to finance and human resources. We’re also investing with the longer term in mind by creating digital capabilities that support our strategic objectives. And we anticipate cost reduction in addition to benefits in terms of customer experience, safety and sustainability. We now have scale and diversification across the urbanization platform, with exposure to more than a dozen gateway cities, including a residential for-rent pipeline that has grown from its inception to more than $24 billion within 5 years. Turning to the Development outlook on Slide 18. Work in progress, the future indicator of production, was steady at $12.2 billion, with $2 billion of residential commencements broadly offset by production and foreign exchange movements. They included the next apartments for-sale towers at TRX in Kuala Lumpur and the Elephant Park in London and the start of 100 Claremont in New York. Ardor Gardens, our retirement development in Shanghai [classed as] residential for rent, also commenced. There are more than 20 buildings in 9 gateway cities in delivery across our urbanization platform, and approximately 1,500 lots in delivery across our Communities portfolio. The group is working on several nearer-term conversion opportunities that are in various stages of tenant and/or investment partner discussion. Following the success of Residences One at One Sydney Harbour, we’ve commenced an exclusive campaign for Residences Two that will comprise 322 apartments. Early demand has been strong, and we will look to establish a joint venture to deliver the tower once sufficient presales have been achieved. We will also look to form a joint venture on our project at 30 Van Ness in San Francisco. There are also conversion opportunities for office developments at Melbourne Quarter, International Quarter London and Milan Innovation District. Looking further out, we expect to convert more than $20 billion of Development pipeline into work in progress by the end of FY ’23 or approximately $8 billion per annum. Our operating platform spans 13 gateway cities, with initial product launches expected across 5 urbanization projects within this time frame. We expect a recovery in underlying demand in apartments for sale and office, while interest in apartments for rent is expected to remain strong. The master plan communities portfolio has reached a trough, with a gradual recovery expected over the coming year. The sector outlook is strong in this low interest rate environment, and we expect to launch several new projects in FY ’22. Moving to the Construction segment on Slide 19. The Construction segment has displayed resilience through a very challenging period, with the business rebounding from the significant COVID-19 disruptions experienced in the second half of FY ’20 to deliver a solid result. The teams have worked extremely hard to achieve this result, which is testament to the collaborative relationships we have with our clients. Revenue was down 21%, with activity still impacted by delays in the commencement of new projects and ongoing productivity impacts across sites. The portfolio performed well across all regions, aided by contributions from projects either nearing or reaching completion. In addition, disciplined cost management implemented in response to COVID-19 had a positive impact on returns. Extensive sector expertise and geographic diversity has been critical for the business to navigate through a difficult operating environment. Government clients in the Australian region were the key drivers of new work secured, offsetting reduced activity in the Americas and delays in the conversion of internal development work. New work secured of $4.9 billion was up from $3.1 billion with the Australian and European businesses benefiting from public sector activity. New work secured in the Americas was well below historical averages, reflecting subdued activity in the key markets along with some delays in projects being brought to market. The outlook for the Construction segment has improved, although remains at risk from ongoing COVID-19-related uncertainty and disruption. Backlog revenue remained solid at $14.5 billion, with $11.8 billion relating to external clients. The backlog remains diversified by both client type and geography. Public sector projects have become more important for the business in the near term and now account for more than half the backlog. This has also resulted in a shift in the sector mix, with the social infrastructure and defense sectors becoming more prominent as a proportion of the backlog. Moving to Slide 20 and our Investments segment. Management EBITDA was $71 million, down from $120 million. We’ve enhanced our disclosure for management earnings by providing the revenues for funds and asset management separately. Funds management revenue of $79 million was down from $133 million due primarily to the significant performance fee generated from the completion of Paya Lebar Quarter in the prior corresponding period, with base fees stable as a proportion of funds under management. Asset management revenue of $45 million was down from $57 million, reflecting lower retail leasing and asset management fees in Australia and Asia. Residential asset management fees now represent the largest component of our asset management operations. Funds under management grew 3% to $37.9 billion, underpinned by a new $2 billion multi-sector investment mandate secured in Australia. The growth more than offset the negative foreign exchange translation impact due to the appreciation of the Australian dollar. The group’s urbanization development pipeline is expected to continue to provide a key source of future growth for the Investments platform. The existing urbanization development pipeline includes more than $50 billion of institutional investment-grade product across commercial and residential for-rent assets. Assets under management declined slightly to $27.6 billion, with the foreign exchange translation impact on the U.S. residential portfolio more than offsetting an additional $600 million of assets. Despite the challenging operating environment, valuation declines were modest. The commencement of $1 billion in redevelopment activity in the U.S. military housing portfolio is expected to contribute significantly to asset management fees in the second half of FY ’21. Turning now to Slide 21 and our ownership earnings, which are derived from our $3.7 billion of investments. Ownership EBITDA of $50 million, while recovering from a small loss in the second half of FY ’20, was down from $104 million in the prior corresponding period, reflecting lower investment income and the nonrecurrence of asset sale profits. The group’s investments closed lower following the sale of the US Telecommunications infrastructure business. The investment portfolio is well diversified, with the predominant exposure across the retirement, office, retail and residential sectors. The trading performance of the Retirement Living business was subdued, with resales across the established village portfolio down 19%. This resulted in low single-digit returns. Pleasingly, we’ve observed a material pickup in both inquiry and net reservations in the current half. The challenging retail environment also resulted in lower returns across the group’s retail investments. The group’s strategy is to significantly grow its investment portfolio. This is expected to include retaining a larger proportion of completed assets from the Development pipeline and investing alongside partners through the launch of new products. Moving now to Slide 22, the noncore segment. The total estimated proceeds for the sale of the Engineering business is $197 million, including the sale price and additional estimated completion adjustments. Under the terms of the sale agreement, Lendlease retained 3 projects. The Kingsford Smith Drive and NorthConnex projects reached practical completion and were operational during the period. The remaining project for the group is the Melbourne Metro Project. The Cross Yarra Partnership and the D&C subcontractor joint venture between Lendlease, John Holland and Bouygues Construction resolved identified issues with the Victorian government in relation to the scope and costs on the project. The position of the project following the agreement remained consistent with the position taken in the financial statements as at 30 June 2020. The EBITDA for the period was $24 million. This reflects the performance of the Services business, the Engineering business prior to the completion of the sale, the retained Engineering projects post the sale and expensing the remaining exit costs. The Services business delivered a solid underlying operating result. However, additional costs of $11 million associated with the wind-up of the Energy & Technology business detracted from the otherwise robust performance. New work secured of $800 million reflected contract wins across the transport, water and telecommunications sectors. Backlog revenue of $2.5 billion provides a solid base of work. The business is well placed to secure future projects in target sectors, including an expected boost from additional public sector spending. Moving to the outlook on Slide 24. The group is well positioned to improve returns as operating conditions continue to recover. We’ve made significant progress on our strategic priorities that enable the group to leverage its competitive edge in placemaking and the integrated business model. More resources are being allocated to our focus areas of large-scale mixed-use urbanization projects and creating a scale Investments platform. Health and safety remains our top priority, and we are committed to continuous improvement. This will be my last results before I retire at the end of May. It’s been a tremendous privilege to lead Lendlease for more than 12 years. I’d like to thank every one of our people around the world for their dedication in delivering our projects safely and sustainably on behalf of our customers, investment partners and the communities in which we operate. Over the last decade, we’ve transformed the group into a fully integrated international real estate organization with a portfolio of 22 major urbanization projects and an Investments platform that is positioned for significant growth. I’m very pleased the Board has selected Tony Lombardo as my successor. Tony’s appointment reinforces the outstanding bench strength we’ve built in senior management at Lendlease. I’ve worked closely with Tony for many years, and I’m confident in the future of Lendlease in his hands. We’ll now open up for questions. The webcast is not two way, so we’ll only be able to take questions over the phone. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Your first question comes from James Druce of CLSA. ——————————————————————————– James Druce, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– Steve, congratulations on a very long storied career. My first question, just around gearing actually. You’re sort of guiding to the low end of gearing for the full year. It’s coming pretty low already. Is that gearing going to decline, do you think, in the second half? ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– James, Frank here, yes. So a few things to point to in the second half. Obviously, we’ve got the remaining process fee coming from the Engineering business. So that’s about $160 million. And last week, you will have seen that we announced a further 25% sell-down of the Retirement Living business. So that’ll bring in another $460 million in the half, but offsetting this, we will be still looking to continue to invest across our Development and Investments segment in the second half. So I think our current expectation is we think we’re well placed to manage gearing in the bottom half of our target 10% to 20% range. ——————————————————————————– James Druce, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– Okay. And then maybe just on some of the forward sales in the Development pipeline. There’s a few things that looked close to converting. What’s closest? And how are you thinking about the timing for that? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. Without being too specific, the reality is we are well advanced on a number of discussions. So there are projects that I think we’ve already flagged earlier that were in our pipeline for FY ’21. They include the MIND project in Milan. There is — we’re well advanced in discussions with potential investment partner on that project. Also, International Quarter in London, we have a partner that we’re in discussions with currently, so both of those have progressed quite well. On Melbourne Quarter, the next building there, we are still awaiting an outcome on tenancy pre commit. And that outcome is probably imminent. And we have got investor appetite for that project as well, so we need to just assess where we get to with the tenant discussions that we’re having as to timing of launch. And then the other one, I guess, is the second residential building here at One Sydney Harbour, which we have mentioned there is a significant amount of interest in that building through the market discussions we’ve been having. So as soon as we hit a designated presales target, we expect to launch a joint venture. ——————————————————————————– James Druce, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– Okay, fantastic. And one final one, if I may: Has there been any change to the timing around the Google project? I think you’re expecting planning approval this calendar year. Can you confirm that’s still the case? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. So we’ve launched the planning application for the first 2 precincts. And typically they take in the order of 12 or so months, could be up to 18 months, so if we end up at the lower end of that range, then we would get planning approval for the first phase in this calendar year. That’s certainly the aim, but on both those first 2 precincts we’re hopeful that we’ll get through planning approval for both of them in the financial year ’22. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Sholto Maconochie of Jefferies. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Steve and team, (inaudible) but just a quick one on the retirement sale. That’s your target weighting now, 50%. Is that what you intend to hold now? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, we’ve previously flagged that we think longer term we could sell-down potentially to 25%, but that will be over time. And it will also be dependent on the opportunities that present themselves strategically. We think that this is a sector that has great long-term potential. And as I flagged, this half, we’re already seeing significant pickup in inquiry. Aware is a great partner to bring in. So with Aware and APG there alongside us, we think there’s — that outlook is fantastic, but longer term, just as a matter of capital weighting given the size of our balance sheet, we think probably over time we’ll end up at a 25% long-term hold. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Great. And then just on Services, it seems like that you’re getting work. Are you anticipating to potentially close that transaction in this half? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– I don’t want to put a time frame on it, but we’ve had — we flagged that we’re doing market [samples]. We had a fair bit of inbound inquiry. Obviously, in this low interest rate environment there’s a fair bit of appetite from a number of participants, so we’ll test that — those market [samplings] in the short term to make some decisions on targets and timing. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– And then just on the two — tower two at One Sydney Harbour. So you launched that. Do you think, if you get the presales, you’d do a PLLACes transaction this period? Or you’re just more focused on launching it once you get the presales. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Sholto, Frank here. I think — once we get the presales for the thresholds we’re targeting, I think the focus will be on bringing in a JV partner. And then collectively with the JV partner we’ll work through what’s the optimal funding structure on the JV. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– And [I’m not sure]. I think you had  on tower one. This is a bit smaller, so lower average price per apartment. You’ve still got [100, 110] EBITDA. [Would that be a sort of lovelier target for if — plan at this period]? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. We haven’t — we don’t break down the EBITDA on a building-by-building basis, but obviously the — it’s the target pricing is very similar to tower one and obviously slightly different product. But I think you will have seen from Crown’s results in the last half that there’s a fair bit of appetite at the top end of the market. So as you’d expect, the inquiry levels for the second tower are pretty good, so we’ll be obviously looking to maximize returns. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Yes. And just finally, you talked just through the projects. You’ve got a lot of big progress made in the half on developments and progressing them. And can — you talk sort of uncertainty in tenant demand and capital partners in the conversion of the pipeline. Can you sort of expand on that? Was that just related to the existing projects taking longer to convert that you mentioned just before? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, that’s exactly right. So we — what we’re very confident on is that there’s a lot of capital chasing opportunities, but it’s taken longer to get decisions made. So some of the tenancy decisions have taken longer. Some of the capital decisions have also taken a bit longer, so we’ve been — obviously, we can’t really be too bullish on what side of half year transactions land on. We target things over a financial year. And we’re well progressed on the projects that we’ve flagged, pretty close to a couple of deals, but those delays have meant that we didn’t land 1 or 2 of them in the first half that we would have liked to. So — but progress is still going quite well. ——————————————————————————– Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– And on this capital. [As high] — obviously, the bond rate has gone up a lot in the last few months. Just have your capital partners talked to you about the demand waning a bit? Or they have a longer-term view, so that hasn’t impacted the demand for product. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, look, there’s — they are long-term investors. And I think, whilst that your observation is correct, nevertheless, the prevailing sentiment is that it’s very difficult to find asset classes to invest in with a significant margin over the debt — over the very cheap debt, with a high degree of security. And real estate does continue to offer that. So there seems to be quite a bit of unpent demand out there. For us, obviously, it’s a mixture of development and investment product that we’re looking to source. And we’re in discussions in relation to the projects we’ve talked about but also in relation to a couple of investment products as well. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Stuart McLean of Macquarie. ——————————————————————————– Stuart McLean, Macquarie Research – Research Analyst  ——————————————————————————– Just looking at margins in the Construction business. So Australia sort of came in at 4%, Asia 8%, Europe a tick over 3%. Just wondering how sustainable some of these margins are. I think you mentioned that some of the — well, some of the margins were boosted by projects reaching the end of their time line. Can you hit that upper end of 2% to 3% in the next half as well, Steve? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. So there were a couple of factors, the project completions, as you flagged, and also some very determined cost management measures that we took obviously in reaction to COVID. So we think there was a very good performance in this half. Yes, in the second half, we may see a bit lower margin, but the reality is it’s more a case of are we going to continue to be able to navigate through the COVID uncertainty if there are slowdown or productivity impacts in some markets that might drive our margin down a little bit. But it’s been a very good half; and the 2% to 3% remains the right target range, though, going forward. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Just so we did — as Steve pointed to, we did see a bit of benefit from projects completing or nearing completion in the half. So obviously now we’re starting work on the new works that were secured in the half, so unlikely to see that same benefit flow through in the second half. ——————————————————————————– Stuart McLean, Macquarie Research – Research Analyst  ——————————————————————————– Yes. Some of that cost-out, you can carry forward. It wasn’t just a one-off benefit (technical difficulty) And then my next question is just on the Development profit. So $31 million from divestments in IQL North and acquisition of a 50% stake in IQL South, can you just run through what that was? ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Yes, I might take that one, Stuart. So on IQL, previously we were in partnership with London and Continental Railways. So we’ve been working on a restructure of that project over the last sort of 12 to 18 months. And where we landed was basically us selling out on the North part of the plot to our partner there, our 50% share. And we bought out their 50% share on the South plot. And as part of that transaction, there was a gain, as a result, of $31 million in EBITDA. ——————————————————————————– Stuart McLean, Macquarie Research – Research Analyst  ——————————————————————————– Okay. And my final question is just around continued simplification of the business. So you, within 12 months time, kind of ticked off the telco sale, the [solar sale] and resolving [retirement] to some degree and resolving Services. Just wondering what else could be in the pipeline [for continuing the simplification]. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, I think we will have gotten through most of the restructuring in terms of simplifying the business. We’ve had a number of questions over time on retirement, which we’re now going to be at 50%, as I’ve alluded to before; longer term simply because of the way — the capital, probably get down to about 25% long-term hold on that business. The other questions that we typically get, around Communities. Communities is a business that is very much part of what we do, and we will continue to assess the performance of that business over time. We think that, over the next short term, the market is pretty strong. We’re going to be releasing some new projects in FY ’22, so hopefully, we’ll see a recovery in that business. The — and then the other one that we get some questions around, on telco towers. We’ve divested the telco towers business in the U.S., which we announced recently. And on military housing, again military housing is a very large asset management style business. There’s some — we flagged that we’ve — now have got the additional capital that’s going through the Development side of that business. That was one of the reasons why we said that we were going to hold that business in the medium term, but we’ll consider in the long term where that fits within the product category as well. ——————————————————————————– Stuart McLean, Macquarie Research – Research Analyst  ——————————————————————————– So it sounds like there are no other business lines that are considered noncore or you’d look to divest. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– We don’t have anything up for sale based on it being noncore at this point in time that we haven’t progressed through. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Simon Chan of Morgan Stanley. ——————————————————————————– Simon Chan, Morgan Stanley, Research Division – VP & Equity Analyst  ——————————————————————————– Steve and Frank, my first question is just in relation to your residential communities business. You settled 1,000-odd, but then it looks like you’ve only made about 800 presales. That’s a pretty low number in light of — or the industry data we’ve been seeing, HomeBuilder package and all that sort of stuff. Just wondering what happened in that business. I always thought you’ll see some booming presales there. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. As we discussed at — in August, what we flagged is that we didn’t have projects, particularly in New South Wales; a couple of our projects still going through planning approvals, so we weren’t even in a position to bring enough product to market to take advantage of the recovering market, which is why those numbers are low on a comparative basis, but we have now made good progress on approvals. And as I said, we expect to launch some new projects in FY ’22, so our expectation is you’ll see a material recovery in that business. Our target, as you know, is to get up to between 3,000 and 4,000 settlements a year, so over the next 18 months, you should expect us to start to get to those levels. ——————————————————————————– Simon Chan, Morgan Stanley, Research Division – VP & Equity Analyst  ——————————————————————————– And you — I think, in one of your presentation slides I saw, you remain confident over the medium term you guys can convert more than $20 billion of your Development pipeline by the end of FY ’23. Can you just walk us through some of the assumptions behind the statement? Like what commercial projects are you referring to? It’s just the first time I recall you put this $20 billion number in writing. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– So we’re currently at, in terms of work in progress, $12.2 billion. And then some of the projects that I’ve flagged a little bit earlier in relation to progressing discussions with partners are included in that target $20 billion. So as we execute on joint ventures — so for example, on Sydney Harbour, the second building on One Sydney Harbour, once we launch that joint venture, that would go into work in progress. There are a number of other projects around the world like MIND, where we’re in advanced discussions with a number of tenants and we’re also in advanced discussions with a capital partner. That would then go into the work in progress as well. So that adds to the $12.2 billion and take us up to our $20 billion. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– (inaudible) I’ll point you too in the appendix. We do have a couple of slides in there with indicative conversion time line tables across resi for rent, resi for sale and commercial that goes into the sort of next level of detail behind that $20 billion sort of target over the next 2.5 years. ——————————————————————————– Simon Chan, Morgan Stanley, Research Division – VP & Equity Analyst  ——————————————————————————– Great. And just last one: Hey, can you clarify that London IQL issue with London and Continental Railway? So you are completely out of North and they are completely out of South, so does that mean, that project, you will be looking for a new capital partner going forward? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, that’s right. And we’re already in discussions with a potential capital partner on that project. So the — what is left to be produced in that project is a number of commercial developments, but the capital partner that we’re intending to bring in would be a programmatic partnership across the balance of the site. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Tom Bodor of UBS. ——————————————————————————– Tom Bodor, UBS Investment Bank, Research Division – Director  ——————————————————————————– Steve and Frank, I just wanted to check on the retirement sell-down. [And you sort of] mentioned that it was at book value, but I wanted to understand how that book value has changed in the last 6 months. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– [Tom], it’s broadly flat over the 6-month period from June, a little bit up. So the revaluations were — I think it was $6 million up between June and December, but I’ll — I can come back to you with the exact number. ——————————————————————————– Tom Bodor, UBS Investment Bank, Research Division – Director  ——————————————————————————– Okay. And then the final one was just on the Silvertown project. It looks like it’s dropped out of your residential for-rent pipeline on — in the appendix slides. I just wanted to understand if there’s been a change of the vision for that scheme or — if yes, something has changed there. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– We’ll have to come back to you on that one, Tom, because that’s — there’s no change there. The — we are still progressing discussions with the government, with the Greater London authority on timing and approvals. So the mix of that project has changed a bit in terms of our proposed timing of residential for rent and affordable housing versus residential for sale. So that may be why the numbers have changed. So we’ll just come back to — with that question, but we are still progressing discussions around that project on the time line that we’ve previously indicated. ——————————————————————————– Tom Bodor, UBS Investment Bank, Research Division – Director  ——————————————————————————– Okay. And all the best in your retirement, Steve. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– [Thank you very much], Tom. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Sameer Chopra of Bank of America Securities. ——————————————————————————– Sameer Chopra, BofA Securities, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research  ——————————————————————————– Best wishes, Steve, for future endeavors. Hey, I just had 3. Some of these are follow-up questions to what have been asked before. Construction EBITDA up 1%, margin up to 3%, revenue down 24%. And I’m just trying to get a handle on how come revenue is down 24% and we’re still able to post an EBITDA growth? It means cost management would have been excellent. I mean, could you walk us through what happened with costs? I know some projects hit completion, but costs would have been down significantly to have delivered an EBITDA positive. Could you walk us through some practical things that were done to bring costs down that much in Construction? ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Sameer, maybe we can take you through the detail on that one later on in the afternoon when we catch up. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. It’s obviously very much project specific and timing of completion of projects as well as the costs side. So it’s not a simple matter of a 24% reduction in costs to drive the improvement in EBITDA performance. So we’ll need to talk you through just the timing of completions and what’s contributed to that. ——————————————————————————– Sameer Chopra, BofA Securities, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research  ——————————————————————————– Okay. And then on build to rent, it will make up about 17% of the $20 billion pipeline. What are you seeing on demand trends right now? With people looking to maybe move out of urban centers and reside more in regional areas, how confident are you that 17% of the $20 billion pipeline that’s kind of build to rent can be executed in the next 2 years? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. On the build to rent market outlook more generally, the — if you look overseas, where a lot of our product has been secured, there’s a very strong and mature multifamily market in the U.S. There’s a very significant growing market in the U.K., where we have a number of projects. And then in Australia there is significant appetite from investors for the build to rent sector. What we have flagged before is that there’s a combination of reasons, including tax leakage, which makes the return profile for build to rent in Australia not quite as attractive as overseas. That said, there have been some changes, for example, in New South Wales in relation to the 50% land tax reduction for build-to-rent developments with at least 50 units in them. And there’s also an exemption from foreign investor surcharge until 2040. So initiatives like that are making the build to rent market more attractive for developers than it has been in the past. So our expectation is that there will be significant demand for build-to-rent product in the coming years. ——————————————————————————– Sameer Chopra, BofA Securities, Research Division – Head of Australian Research and Co-Head of Regional Telecom Research  ——————————————————————————– Okay. And final question is the Development book is [about] $3.5 billion in production per annum right now, scaling up towards $8 billion by FY ’23. Do you think it’s linear, or exponential? Like do you think ’22 will be a $5.5 billion, $6 billion sort of range? Or do you think it’ll be closer to the today run rate and then it sort of really explodes out into FY ’23? So do you see it as linear, or more sort of exponential? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes, look, I — it’s not linear. Obviously given the scale of the projects that we operate on, launching a new project of $1 billion-plus and seeing those projects work through a 2- to 3-year completion time frame means that, as you launch a new project, production completion is a couple of years out. So what we’ve flagged is that we get to our $20 billion work in progress target by FY ’23, and that’ll feed into an $8 billion per annum run rate going forward, but exactly when we get there, we’re not being definitive on. Obviously, we’ve got to execute transactions to do that, but it’s not a linear equation. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Richard Jones of JPMorgan. ——————————————————————————– Richard Barry Jones, JPMorgan Chase & Co, Research Division – VP  ——————————————————————————– Can I say it’s — I appreciate it’s been a long call, so I’ll try and be quick. Just on Construction: You called out kind of COVID-related impacts having a drag on first half revenue. Are you expecting them to normalize in the second half? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Well, we’re hopeful, but of course, it does come down to individual circumstances in individual markets. So our projects in Australia are pretty much up and running, but then we had the 5-day lockdown in Victoria, which meant that all but 2 projects actually closed for a very short period. So those sorts of nuances we can’t really be too predictive about, but hopefully, with vaccine rollout, we’re starting to come out of the worst of COVID. And we’ll get a bit more stability going forward in the various different markets. So that will be the key driver of revenue for some projects people have paused on around the world that would have otherwise come to market already. So hopefully, we’ll see that maybe over the next 6 months. There’s still a bit of rebalancing of various markets, but post that we’re hoping for a lot more stability. ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– (inaudible) a very strong half in terms of new work secured at just under $5 billion. Now COVID did mean that there was some delay in getting some of those projects started, but that strong new work secured in the first half should flow into some revenue benefit in the second half. ——————————————————————————– Richard Barry Jones, JPMorgan Chase & Co, Research Division – VP  ——————————————————————————– And just finally, just on the ownership earnings, it looks really low return, [paying] $50 million on the total divisional investment. I mean, is — what’s behind that very low return? ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Absolutely. It is a low return for the half. Key drag is from our investments in the retail sector and also in the retirement business. So the retail sector, whilst we have seen a good improvement in rent collections, there was lower distributions across our investments in the retail sector during the half. And then in retirement, I think as Steve flagged, there was much lower resales in the half. I think 19% down half-on-half, so that had an impact on DMF income and caused the drag in that income return from retirement. So it’s basically retirement and retail were the 2 key drags in the half. ——————————————————————————– Richard Barry Jones, JPMorgan Chase & Co, Research Division – VP  ——————————————————————————– [Any of the funds] not paying a dividend (inaudible) retail? ——————————————————————————– Frank R. Krile, Lendlease Group – Interim Group CFO  ——————————————————————————– Yes. So some of the retail funds didn’t pay a distribution during the half, correct, [yes]. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Peter Zuk of Crédit Suisse. ——————————————————————————– Peter Zuk, Crédit Suisse AG, Research Division – Director  ——————————————————————————– A very quick one just in terms of the commercial and — well, mainly focus on commercial developments. I mean, are you leaving any margin on the table, I guess, to kick-start things and, hopefully, drive growth in funds under management? ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– No, it’s I’m not sure how to answer that question. Obviously, every time we look at a transaction, we’ve got to balance that. And that’s an ongoing part of our business decisions. So if — we could ride right through a development project to try and maximize profit rather than maximize IRR or investment growth, but we typically look at our balance sheet capacity and look at what we need to derisk and what’s going to underline longer-term growth aspirations. Investment management income is one of those things. So we do sometimes bring partners in at rates that provide an opportunity for them to get attractive returns, which might mean that we’re not keeping all of the upside for ourselves, but that’s a trade-off decision we make all the time. And I wouldn’t say that we’re today necessarily doing that any more than we have in the past. I would say, however, that when you look at the projects we flagged, we’re very keen to get some momentum in a couple of those development partnerships. We’ve mentioned that we want to have more programmatic relationships going forward, so where we think we can bring partners in who are long-term really attractive investment partners who are going to be there on a programmatic basis. We’ll probably do those deals a bit sharper than deals that are one-off transactions where we’re looking to maximize price. ——————————————————————————– Peter Zuk, Crédit Suisse AG, Research Division – Director  ——————————————————————————– Steve, all the best wishes. ——————————————————————————– Operator  ——————————————————————————– Thank you. There are no further questions at this time. I will now hand back to Mr. McCann for closing remarks. ——————————————————————————– Stephen B. McCann, Lendlease Group – Group CEO, MD & Executive Director  ——————————————————————————– Yes. Look, thanks, everybody, for joining us. Obviously, it’s been a continuing challenging market out there, but it is very encouraging to see where things are getting with the vaccine rollout globally and also with the way that the Australian market has managed to navigate its way through COVID. So we are feeling optimistic around some of the transactions that we’ve been looking to close out, and we’ll continue to give the market an update on a deal-by-deal basis. So thanks very much.