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Edited Transcript of LLC.AX earnings conference call or presentation 19-Aug-19 12:00am GMT

Full Year 2019 LendLease Group Earnings Presentation

Millers Point, New South Wales Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of LendLease Group earnings conference call or presentation Monday, August 19, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen B. McCann

Lendlease Group - Group CEO, MD & Director

* Tarun D. Gupta

Lendlease Group - Group CFO

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Conference Call Participants

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* Benjamin J. Brayshaw

JP Morgan Chase & Co, Research Division - Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Sameer Chopra

BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research

* Stuart McLean

Macquarie Research - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Lendlease 2019 Full Year Results Briefing by Steve McCann, Group Chief Executive Officer and Managing Director; and Tarun Gupta, Group Chief Financial Officer.

Please note this call is being recorded.

I'd now like to hand over to Mr. McCann.

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [2]

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Good morning and welcome to the Lendlease 2019 Full 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 future. Joining me in the room is Tarun Gupta, Group Chief Financial Officer.

Today, I'll provide an overview of Lendlease's results for the period ended 30 June 2019. I'll then hand over to Tarun, 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.

Lendlease's long-term value is driven by 5 focus areas that drive our approach to create economic, safe and sustainable outcomes for our customers, partners, security holders and people. As today's briefing focus is primarily on the financial, I'll first touch on the nonfinancial focus areas that drive our performance.

As always, our first and most important priority is health and safety. Our commitment to the health and safety of all who interact with a Lendlease place holds the highest priority in our organization. The frequency rate for lost time injuries was 1.8, and the percentage of operations without critical incidents was 90%. While our long-term trends are positive, we need to continue our uncompromising focus on safety everywhere we operate.

An inclusive and diverse work environment inspires employees and drives both innovation and business growth. 26.1% of leadership positions in our organization are held by women, and 3 of our 9 Board directors are female. For the second year running, we have been named a platinum employer by the Australian Workplace Equality Index, recognizing the work we do to promote LGBTI inclusion. From a customer perspective, our global focus on customer feedback and measurement has informed numerous initiatives. New digital portals for our retail customers is one such initiative.

Our approach to sustainability is focused on the 2 principal areas of environment and community. During the year, our flagship office fund APPF Commercial was again ranked first globally in the 2018 GRESB survey, the fourth time in 5 years the fund has achieved this ranking.

Turning now to Slide 5. We announced at the half year 2019 result the decision that the Engineering and Services business is noncore and will be separated from the group. A comprehensive strategic review concluded that this decision is in the best interest of our employees and security holders and allows both Lendlease Group and the Engineering and Services business to focus on their core competitive advantages.

First, to the impact of the noncore business, which was disappointing and adversely impacted the group. The EBITDA loss of $461 million included a $500 million provision for underperforming projects that was brought to account in the first half of the financial year. The provision related primarily to 3 engineering projects, with the estimated cost of completing these projects incorporated within that provision. A brief update on the 3 projects: Gateway Upgrade North has been operational since March 2019. The other 2 projects, Kingsford Smith Drive and NorthConnex, are both more than 85% complete and are due to finish in calendar year 2020. Works on Kingsford Smith Drive that were unaffected by the redesign are scheduled to complete by the end of this calendar year, while the works on the rock anchor solution to rectify the design defect are well underway. The final major phase of work on NorthConnex, that is mechanical and electrical, commenced towards the end of the financial year. Phases that incorporated lining, waterproofing and paving are substantially complete.

This brings me to the remainder of the Engineering portfolio. New work secured was $2 billion, including the WestConnex 3a M4-M5 link and additional works on the Southern Program Alliance. The business closed the year with a backlog of $3.8 billion and remains active in bidding for work that is in line with the revised lower-risk appetite parameters that came out of the strategic review. There is currently more than $1.6 billion of projects in bid stage, including several road and rail upgrades and additional Western Sydney Airport works. The 2 largest contracts, Melbourne Metro Tunnel Project and WestConnex 3a M4-M5 link, account for the majority of current backlog. Both projects are less than 20% complete.

We have reviewed the status of the entire Engineering portfolio as part of our full year reporting process. This review confirmed that the level of provisioning is appropriate. The Services business remains a solid contributor to both revenue and profit, with an EBITDA margin of approximately 5% delivered in the year. New work secured of $1 billion was diversified by sector, with contract wins across telecommunications, utilities, solar and transport. The business closed the year with a backlog of $1.6 billion and an attractive pipeline of future opportunities.

Now to the separation process. As part of the separation, a sale process has been initiated for Engineering and Services, which has generated a good level of interest. Several parties are currently undertaking detailed due diligence. We remain committed to delivering the best possible outcome from the sale process for our clients, employees and security holders.

At the half year results, we announced a preliminary estimate of future restructuring costs associated with the separation of $450 million to $550 million pretax. It was anticipated that these costs may include implementation costs such as technology and systems, employee and advisory costs and potential costs or indemnities to cover concluding existing customer contracts. The restructuring cost estimate excludes any revenue from ongoing operations or proceeds received from sale. The restructuring cost estimate remains appropriate based on the current portfolio position and the progress made on the sale. To date, $15 million of restructuring costs have been expensed relating entirely to implementation costs.

Turning to Slide 6. Lendlease's core strategy is focused on urbanization in gateway cities, and we aim to be the urbanization partner of choice. Our ability to deliver across all aspects of major urbanization projects, together with our financial strength and strong track record, provide a point of difference we believe few can match. Applying a disciplined commercial approach informed by the 6 key trends which drive our business model helps us create great places which make a positive contribution in meeting the world's significant urbanization challenges.

Turning now to Slide 7.

It was a difficult year for the group, with the provision taken in the first half for underperforming Engineering projects impacting the overall result. Profit after tax was $467 million, with earnings per stapled security of $0.824. Distributions of $0.42 per stapled security represent a payout ratio at the midpoint of the 40% to 60% target range. The group's core business, excluding Engineering and Services, had a solid year with profit after tax of $804 million; and a return on equity of 12.8%, towards the upper end of our 10% to 14% target range.

Origination was strong, with the group's development pipeline now approaching $100 billion after securing 4 major urbanization projects, 1 of which was secured post balance date. Development ROIC of 11.6% was underpinned by strong apartment earnings across a range of urbanization projects, the completion of the office precinct at Paya Lebar Quarter and the formation of the residential investment partnership in the U.S.

The core Construction margin of 2.2% was generated on $9.7 billion of revenue. The Investments ROIC of 10.8% reflected strong growth in funds under management and solid ownership income.

The group remains in a strong financial position, with gearing at the bottom of the target range and $3.9 billion of available liquidity.

Turning to Slide 8. During the year, we cemented the group's position as a global leader in urbanization. Securing 4 projects takes our development pipeline to almost $100 billion, providing substantial visibility on expected future earnings. We were delighted to be chosen by Google to partner with them to develop 3 mixed-use communities in the San Francisco Bay Area. The predominantly residential-led scheme has an end value of approximately $20 billion and will deliver more than 15,000 new homes over a 10- to 15-year time frame. At almost $30 billion, we now have a scale urbanization platform in the U.S., which has been achieved within 5 years of extending the integrated model to that market.

In FY '19, 3 major urbanization projects were secured. Milan Innovation District, the site of the World Expo 2015, is a mixed-use development with an estimated end value of $3.6 billion. Lakeshore East in Chicago is a $2.1 billion residential-led project. Victoria Cross in Sydney is an integrated station development anchored by an office tower with an estimated end value of $1.1 billion. Each of these projects are held through capital-efficient arrangements, providing flexibility around delivery and timing. In addition, we are the preferred partner for 2 projects valued at circa $17 billion in the U.K.: Thamesmead Waterfront and Birmingham Smithfield.

We also progressed several capital partner initiatives. In the residential sector, we launched a partnership with First State Super, which has acquired buildings in Chicago and Boston and more recently committed to the first-phase residential at our newly secured Lakeshore East project in Chicago. In Sydney demand for quality office product was strong. We rebalanced our holdings in the office precinct in Barangaroo, introducing 2 capital partners to the precinct. Our current level of co-investment across these assets supports our ongoing alignment with investors and maintains long-term asset management of the precinct. I'm pleased to also note that we have reached a resolution with Infrastructure New South Wales on the Barangaroo sight lines issue, with views from our premium apartments retained across Central Barangaroo from the Harbour Bridge to the Sydney Opera House. Clearly, this is a good outcome for Lendlease. And we will shortly announce the launch of our first residential tower at One Sydney Harbour.

Our development joint venture with ADIA saw the completion of the 83,000-square-meter office precinct at Paya Lebar Quarter in Singapore. Its completion takes funds under management from the office towers to more than $2 billion. We launched a partnership to invest USD 1 billion in the data center sector across the Asia Pacific. Targeting key cities where the group already has a strong presence, the partnership will enable us to leverage our integrated model in a sector with a strong growth outlook. These partnerships continue to highlight the strength and attractiveness of our business model which enables us to source, deliver and manage a broad range of projects.

Turning now to Slide 9.

We committed to focusing on urbanization, and that's exactly what we've done. Being chosen as the development partner for transformational projects across target gateway cities by both public and private sector clients is a strong endorsement of our urbanization capabilities, which are increasingly being recognized as world leading. 5 years ago, we had an urbanization pipeline of $25 billion comprising 7 major projects. At $81.2 billion, it is now more than 3x that size with 21 major projects. In recent years, development activity has averaged $4 billion per annum. There is scope for that figure to accelerate materially over the medium term given the significant growth of the pipeline and its diversity by gateway city and product type. We are currently working through the pace at which production is likely to accelerate and then settle at a new higher annual rate. We'll come back to the market with more detail and revised targets. As we've highlighted previously, neither capital partner demand nor absorption of product are expected to be constraints.

To that end, we've been planning for the next phase of investment for growth. A substantial uplift in the amount of institutional-grade investment product will be created for capital partners and the group's Investments platform as development activity accelerates. We expect to create almost $50 billion of institutional-grade investment product from the current secured pipeline. This comprises approximately $29 billion of commercial assets or 50 buildings and approximately $20 billion of residential for-rent assets or more than 17,000 apartment units. Since FY '14, funds under management has more than doubled from $16 billion to $35 billion. The group is well placed to double funds under management again as the urbanization pipeline is delivered.

I'll now hand over to Tarun.

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Tarun D. Gupta, Lendlease Group - Group CFO [3]

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Thanks, Steve, and good morning, everyone.

Turning first to our financial performance for FY '19 on Slide 11. As Steve noted, the Engineering and Services business is noncore, and we have started the process to separate it from the group. It has been reported in both the financial statements and presentation materials on this basis.

Core operating EBITDA was down 9%, with the Development, Construction and Investments segments all delivering solid returns in line with portfolio targets. However, returns were lower than last year, when each segment performed strongly compared to their respective targets.

Development EBITDA rose by 18% on strong apartment for-sale settlements, while the current urbanization projects in Asia and the Americas made material contributions to earnings. There were 1,623 apartment for-sale settlements in the year, up significantly on 1,314 completions in the prior year. Our Darling Square project in Sydney was the largest contributor. We settled 100% of the 967 apartments across 6 buildings, generating $1.3 billion in revenue at a very healthy margin. Collins Wharf 1 in Melbourne completed, and 85% of the apartments have settled by 30th June. Based on our experience from the last few completed buildings in Victoria Harbour, we expect this building to fully settle in FY '20. The other significant contributor was West Grove at our Elephant Park project in London. The default rate remained below our long-term average in FY '19. In the current cycle, we have delivered 6,500 apartments with a default rate of just 1.2%. There was a slight delay at the construction program at our Clippership Wharf project in Boston. Three buildings were scheduled to complete towards the end of FY '19. They will now complete in the first half of FY '20.

The group completed its first-ever residential for-rent apartment building, The Cooper, at Southbank in Chicago. Market response has been strong, with the building more than 2/3 occupied despite still being early in the stabilization phase. Paya Lebar Quarter in Singapore contributed $130 million to profit following completion of the office precinct. While the residential towers are still in delivery, revenue and profit is being recognized on a percent complete basis. Both the residential and retail components remain on schedule to complete in FY '20. The residential investment partnership in the U.S. acquired 3 residential for-rent buildings from the development pipeline, generating $73 million of profit. As expected, we saw improvement in the second half of the year across the Australian master planned communities portfolio. Combined with the first sales at our Horizon project in Denver, total lot settlements were in line with our FY '19 target of 2,500 lots.

The Construction segment delivered EBITDA of $211 million at a margin of 2.2%.

Investments EBITDA of $489 million was strong. However, it was lower than FY '18 which was driven by substantial gains in underlying asset values. This was due to 3 key reasons: First, our result last year included a strong uplift in the value of the equity investment in the U.S. military housing operations; co-investment revaluations of 11% of core operating EBITDA compared to 7% in FY '19; and finally, last year, we had a high ownership level with our retirement living business. Following the sell-down, we now own 75% of that business, and our return on capital was 7.5% this year.

Group services costs of $140 million were flat, as the group continues to focus on underlying expense management. Net finance costs of $125 million were up substantially on the prior year given the higher level of financing activity and higher average net debt.

Moving now to Slide 12. The chart provides an overview of the major movements in net cash flows during the year on an underlying basis. Cash flow coverage, that is underlying operating cash flow-to-EBITDA, has averaged 85% over the last 5 years, with the shortfall largely being revaluations and deferred management fee accruals in retirement living. That level is broadly in line with where we expect it to trend over the medium to long term. Over shorter time periods, there will be some variability. In FY '19, the cash flow coverage was 36%. The key driver of this was the payments on our places product. This is a risk-mitigation tool which provides protection in the event of significant apartment defaults. It results in the preselling of apartment revenue that is then paid to places investors on settlement. In FY '19, $475 million matured, with the present value of that amount collected in FY '17. Adjusting for this, underlying cash flow conversion was above 90%.

We commenced the year with $1.2 billion in cash. Underlying operating cash flow was $316 million. The major cash inflows during the year included apartments across our urbanization projects, with $2.1 billion in residential for-sale settlements, although the cash inflow was $1.4 billion given the places payment and revenue recognized on joint ventures. The substantial reduction in the group's stake in the office precinct at Barangaroo and the establishment of the U.S. residential investment partnership were other sources of inflow. Key uses of cash during the year included ongoing investment into the development pipeline, the establishment of the Americas residential investment partnership, additional equity commitments for our co-investment positions and the losses incurred on Engineering projects were also a source of cash outflow. Net financing outflows of $128 million reflect the rise in net borrowings of approximately $300 million being more than offset by the distribution payment and the buyback that was active during the year.

We closed the period with a cash balance of $1.3 billion.

Looking now at the group's financial position on Slide 13.

The group remains in a strong financial position with gearing at 9.9%, which is at the bottom of the target range. The balance sheet remains resilient, with total liquidity improving to $3.9 billion. Net debt ended the period at $1.4 billion, up slightly from $1.2 billion in the prior year but down materially from $2.3 billion at half year. Due to our active refinancing activities, the average cost of debt declined from 4.8% to 4% during the year, while average debt maturity improved to 4.8 years, with no material debt expiries until FY '22. Those metrics position the group for the next phase of investment for growth with substantial capacity to fund the development pipeline and grow the base of recurring earnings.

The interest coverage ratio was 8.8x. We have $3.7 billion in investments across co-investments, retirement living and infrastructure and retail assets. While co-investments were stable over the year at $1.7 billion, there were some significant movements. The reduction in the group's exposure to the office precinct at Barangaroo was offset by the completion of the office precinct at Paya Lebar Quarter and equity contributions we made to APPF Commercial and Industrial during the year.

We remain in a strong financial position with a resilient balance sheet and anticipate gearing to remain within the 10% to 20% range in FY '20.

Turning now to our performance for the core business in the year against the portfolio management framework on Slide 14.

In terms of EBITDA mix, the Development segment was above the range, with both the Investments and Construction segments within their target ranges. In line with our stated strategy to pivot to international markets, our capital weighting to Australia has declined. The reduction in the exposure to the Barangaroo office precinct saw the allocation move below 50% late in the year. Capital is being increasingly deployed in our international projects where we believe there is strong embedded margin. Returns across each of the segments were within target ranges, with Development midpoint, Investments top end and Construction lower end of their respective ranges.

I will now hand back to Steve for an operational update.

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [4]

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Thank you, Tarun.

Turning to Development on Slide 16.

Development EBITDA was $793 million, driven by apartment for-sale settlements and strong contributions from both Asia and the Americas. We have been deploying capital into our offshore regions for a few years and are now starting to generate solid returns on that capital. We expect the higher earnings contribution from the offshore regions to continue over coming years on the back of the capital shift that has been made towards our international gateway cities. Our recent success in Europe has seen that region's development pipeline increase to $34 billion, while our pipeline in the Americas is now almost on par with Australia with the addition of the project in the San Francisco Bay Area.

Turning to Residential on Slide 17. The pivot towards international urbanization projects is starting to produce tangible results, as these projects have moved into delivery and in some instances now completion. That geographic diversification has been important given the slowdown we have experienced in the Australian apartment market. On that, we believe the broader Australian residential market is near the bottom from both a volume and price perspective, and we have been preparing our portfolio for the next cycle. The next potential apartment launch in Australia is One Sydney Harbour at Barangaroo, while The Exchange at TRX in Kuala Lumpur is also a prospect before the end of the calendar year. With the number of apartments for sale that we have in delivery across the portfolio well off the peak, earnings derived from apartments for sale are also likely to be lower in the next few years given profit is typically recognized on settlement. The exception to that is where we establish development joint ventures that provide funding flexibility and may also crystallize profit earlier.

The pivot has also provided diversity by product with our entry into the residential for-rent sector. Profit on the bulk of our residential for-rent apartment pipeline is likely to be booked when buildings are put into delivery rather than at completion or settlement. This will occur when product is forward sold similar to a commercial forward sale as we saw this year with the U.S. residential investment partnership. We have more than 3,000 apartments for rent currently in advanced planning across 7 urbanization projects. We expect these to be significant earnings contributors.

The communities pipeline remains strong, although we expect another challenging year in FY '20.

Moving to commercial development on Slide 18. 6 buildings across 4 office developments completed during the year. Paya Lebar Quarter in Singapore is performing well, with 75% of the 3 office towers leased and more than 80% of the retail mall due to complete in FY '20 now let. We also completed office buildings at 839 Collins Street in Melbourne, One Melbourne Quarter and 25 King in Brisbane.

The pipeline continues to build with approximately 500,000 square meters of commercial space added in FY '19. That provides a strong position as we enter financial year '20. Potential conversion opportunities are promising over the coming years, with 18 buildings across 10 major projects in various stages of planning. Within that, nearer-term potential conversions include Melbourne Quarter, Milano Santa Giulia and Victoria Cross. In terms of the outlook for near-term commercial profit, there are 3 drivers of earnings: first, the current buildings in delivery; second, new forward sales; and third, the creation of new development joint ventures. The optimal funding structure for each development is determined on a case-by-case basis, having regard to the appropriate risk-return profile.

In the U.S. we continue to work through our telecommunications development pipeline, with 87 towers completed in the year. We are revisiting our joint venture with Softbank given likely industry consolidation. However, we continue to originate opportunities in the sector through the master lease agreements we have with other major carriers.

Moving onto our core Construction segment.

The Construction segment delivered EBITDA of $211 million. The EBITDA margin of 2.2% was in line with the 2% to 3% target range; however, was down on the prior year, driven by lower margins in Australia and the Americas.

Australia delivered strong revenue growth of 8% to $4.1 billion, resulting in EBITDA of $126 million at a margin of 3.1%. The margin over the last 5 years has averaged approximately 4%, with the FY '19 margin impacted by the revenue mix. New work secured was strong at $4.5 billion. Revenue from the Americas was down 9% to $4.3 billion, reflecting weaker activity in Los Angeles and Chicago, 2 of our 5 target cities. EBITDA of $46 million and margin of 1.1% was down on the prior year, impacted by negative operating leverage as a result of lower activity. New work secured of $3.7 billion was broadly flat in local currency terms.

Europe delivered an improved performance, with both revenue and margin up strongly on the prior year. EBITDA was supported by some higher-margin construction management projects and a larger revenue base. Asia continues to focus on the delivery of the internal development pipeline, with internal margin on those projects now reported through the Development segment.

The outlook for the Construction segment is solid with backlog revenue of $15.6 billion, including new work secured in the year of $9.9 billion. Approximately 80% of this backlog will generate future revenue and margin for the Construction segment. Currently, about 20% of our Construction backlog is from our own development projects. The internal margin on these will be reported through the Development segment, and this will grow as we bring our substantial development backlog online.

Our product creation capability remains a key differentiator for our investment management platform, providing quality investment opportunities for both our capital partners and ourselves. Our funds under management grew a further 17% during the year, and our urbanization portfolio is expected to underpin significant growth going forward.

Ownership earnings are derived from our $3.7 billion of investments. Earnings were down in the period primarily due to a strong FY '18. Investment income and asset value appreciation was derived from co-investment positions, particularly in the Australian office portfolio. Resales in the retirement living business were up 21%, as the portfolio recovered from a subdued period associated with industry concerns. The introduction of additional contract types across our portfolio has been well received.

Operating earnings are derived from our funds and asset management platforms, with earnings up 8%, with our growth in funds under management driving a higher fee base. The asset management business has continued to provide a steady base of recurring earnings.

Moving to the outlook on Slide 22.

We believe the group is strongly positioned for long-term growth. Our development pipeline, which is approaching $100 billion, has never been stronger. Our origination and place-making capabilities are unrivaled, and our success in securing international projects has taken the global portfolio to 21 major projects across 10 gateway cities. Our success internationally is testament to our strategy and the depth of talent we've been able to build over many years. I'd like to thank our team for their outstanding efforts in securing these tremendous opportunities.

The Construction backlog is a healthy $15.6 billion and diversified by client, sector and geography. Again, the urbanization platform underpins the security of future earnings from our Construction business.

Our demonstrated ability to partner with third-party capital continues to underpin our business model. The funds management platform has a trajectory for future growth well beyond the current $35.2 billion. We expect this platform to more than double in size as we execute our development pipeline. We have commenced the separation of the noncore business, with the sale process underway. As we work through the separation, we remain committed to delivering the best possible outcome for our clients, employees and security holders. I'd like to conclude by reiterating that our business model and approach is unique. It provides what we believe is a competitive advantage that will endure. The experience of the last year has highlighted the need to stay focused on our core strategy of leveraging our integrated model on urbanization projects.

With that, I'll open it up for questions. The webcast is not 2-way, so we'll only be able to take questions over the phone.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Stuart McLean from Macquarie.

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Stuart McLean, Macquarie Research - Research Analyst [2]

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First question would just be on Engineering and the sale process there. Is the preference still to sell the business in one line? And how deep do you think that the buyers are there? And how confident are you on an outcome for sale? And maybe what are some determining factors in your eyes that make it possible to sell the business from here or what could be the pain points?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [3]

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Yes. So on the sale process, as I've said, that's been initiated. We have -- it has generated a good level of interest, and there are several parties undertaking due diligence. We have invited parties to bid for the entire business in one line or for separately both businesses and we have offers that cover that range. So we'll work through the due diligence process. Now obviously that'll take a little bit of time, but it's going in the right direction.

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Stuart McLean, Macquarie Research - Research Analyst [4]

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Perfect. And then maybe just on the provisions. And you mentioned that you did a complete review of the entire portfolio. I was wondering, does that include Melbourne metro in that review? And does Melbourne metro and [West Kingston] for that matter, need to be over 20% complete before you were to take a provision if things weren't going as well as expected?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [5]

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So the review for -- covered the entire Engineering portfolio. So that's a normal part of our full year process. We've obviously conducted pretty thorough reviews across the book. And that review has confirmed that the level of provisioning is appropriate. The 20% rule, we don't book earnings until we achieve 20%. In the circumstances of when we assess whether or not to take provisions, though, we have regard to the status of all of the projects as they are today.

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Stuart McLean, Macquarie Research - Research Analyst [6]

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Okay. Perfect, understand. And then maybe, Steve, back to some of your comments earlier talking about the significant growth in the urban regeneration pipeline. You said that you might come back to the market with some further color on how you see that coming through. Can you just provide a little bit more detail there, again on your thoughts on how quickly this $100 billion urban regen pipeline can start dropping through into the P&L?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [7]

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Yes. So our intention is to come back to the market a bit later on when we've updated all of the models on timing of the various different projects because there's obviously a lot in there. There are projects at various stages of planning and approval and development, so they -- we will try and give the market some pretty clear direction as to which projects are likely to come online when. As I mentioned, there's a mix of different asset classes. There's also a mix on -- within the residential asset class of build to rent versus build to sell. Build-to-rent backlog is now about 17,000 apartments around the world, so that'll start to drive earnings reasonably quickly. When we look at the previous indicators of the volume of production that we're capable of, those volumes would suggest it will take us 20 to 30 years to work through our backlog. So obviously, looking at that, we're going to look to accelerate the projects and drive those volumes up. So we will give you a bit more clarity on that once we've done that analysis.

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Stuart McLean, Macquarie Research - Research Analyst [8]

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And so you mentioned build to rent, 17,000 apartments. On the commercial office side of it, are they the sorts of earnings that you can forward sell and bring in first?

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Tarun D. Gupta, Lendlease Group - Group CFO [9]

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Yes. Stuart, it's Tarun here. Yes, we've got almost $25 billion worth of commercial assets in the backlog now. And as you know, with our capital partners' support, we can forward sell those once we get planning and some precommitments. So again, we're working through that pipeline, and as planning is progressing on these newly secured projects, we'll back and provide some more clarity.

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Operator [10]

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Our next question comes from Sameer Chopra from Bank of America.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [11]

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I had 3 questions. So like to start off with where Stuart left off. So the $100 billion of development pipeline, you mentioned 50% of that is supported by capital partners. Just wanted to get a sense, so do you think the capital structure as you have it right now can support that $100 billion, or do you think you'll need to significantly change your debt-equity metrics? Or that's...

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [12]

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Yes. So the first thing I'd say is, when you look at the gearing numbers that we have today and our available liquidity, obviously we're still pretty conservative in our approach. Gearing is at currently the lower end of our range. And I think, as Tarun pointed out, we've had a very good last 6 months in terms of completion of settlements and other activities. That's actually managed our liquidity very well, so we're in very good shape to absorb what we need in the shorter term. In terms of access to capital, we've grown our funds under management by 17% per annum in recent years. It's now at $35 billion.

We've flagged that funding our development pipeline will more than double that, so there's pretty significant embedded growth in that pipeline. And what we're seeing today, which we don't have any reason to believe will change in the short to medium term, is a lot of under-allocated equity, which is chasing opportunities in the asset classes that we participate in. And if the world is likely to face a longer-term low interest rate environment, which does seem to be highly probable, then that demand is likely to remain very high. So from our perspective, we can make some decisions on the right timing to bring investors in and to get the right risk-return balance. And it's not a case of putting a strain on the corporate balance sheet.

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Tarun D. Gupta, Lendlease Group - Group CFO [13]

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If I can add, Sameer -- sorry, Sameer. Just it's Tarun here again. Just to add to that, we've identified in the backlog now about $50 billion of investment-grade product in our commercial and resi for-rent pipeline. And with our capital partners' support, obviously we have a lot of flexibility on how we structure those sell-downs, always making sure we can meet our target -- ROIC targets that we've committed to the market. So we have a lot of flexibility on balance sheet and also with access to third-party capital.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [14]

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Tarun, just on that, you mentioned that you had 90% cash conversion after some adjustments. Could you just walk us through the math behind that again and how you get to that 90% cash conversion? And then I have just one last question.

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Tarun D. Gupta, Lendlease Group - Group CFO [15]

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Yes, Sameer, it's the underlying cash flow is $361 million (sic) [$316 million]. If you add $475 million for places which we return to those investors this period, then you end up at 80% -- sorry, over 90% of reported EBITDA.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [16]

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Cool. And then the final one, Steve, is why chase that $1.6 billion of Engineering backlog? So you said that the company is bidding on around $1.6 billion of Engineering projects. Why go down that place when you're looking to sort of wind-down the Engineering segment or exit it?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [17]

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Yes. So when we undertook our review, which we announced the outcome on in February, that review looked at a whole series of things, including the risk profile of the business in the Engineering and Services business, the outlook for the market, et cetera. And we made it clear that we would be adopting a lower-risk profile going forward. There are a whole range of different contract types and there are a whole range of different activities within that sector. So our business is very much focused on the lower-risk end, and that will mean some complex lump-sum projects. We won't have the appetite for risk that will lead us to originate those sorts of projects, so we are being selective. We do have a business which is a going concern. And we do have employees, and we -- as we've said, we'll be doing our best to produce the best possible outcome for our security holders as well as our employees and our clients. So we're committed to delivering the projects that we have, so I think running the business as a going concern, albeit with a lower-risk profile, is the right approach.

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Operator [18]

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Our next question comes from Ben Brayshaw from JPMorgan.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [19]

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Steve and Tarun, congratulations on a strong second half results. Could you talk about the strategy, please, for Building 1 at One Sydney Harbour Barangaroo? I'd just be interested in your thinking around whether you will look to undertake 100% or potentially a joint venture interest on that project? And secondly, your target level of presales, please. Should we be assuming 50% to circa 70% presold prior to committing to that project?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [20]

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Yes. So we -- in relation to One Sydney Harbour, as you broadly pointed out, there's more than 1 building. It's the first tower that we're focused on at the moment. There are 3 towers, 2 high-rise, 1 -- and 1 sort of medium-rise tower. The first tower is 370 units, and we do expect to launch that very shortly. And we will target the usual sort of presales target. And that range of 50% sort of number that you flagged, we think is probably appropriate. When we did start making inquiries around the interest for that tower, we had a look at where the demand would come from. We also had a look at deposit structures, et cetera to make sure that, that proceeds well with a higher level of security than we would typically see given the price of the apartments. So we expect to proceed on that basis. We're pretty confident that the demand is there. Obviously, we've got to now announce the launch and test that over the coming months, but that is the intention.

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Tarun D. Gupta, Lendlease Group - Group CFO [21]

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And Ben, in terms of funding against -- Ben, it's Tarun here. Just funding the tower, obviously we've got to get through presales. We're already in the ground building the basement after remediating the site. And then some point in the future, we'll initially fund with the balance sheet but then look at whether we bring in joint venture partner. Or in fact, we have our places product, still those investors have had a very good experience in our pipeline over the last 3, 4 years, so that remains also an option for us to explore. But we're a bit -- there's a bit of time to go before we reach those decisions.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay. And on Google, could you talk about the activation plan for the project? Over what period of time would you expect initial phases to start to contribute to group earnings?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [23]

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Yes. So on Google, obviously it's a very exciting project for us, and it's been quite a long time in the coming. We've been working with Google for some time now. As you probably know, we're building the head office in London, and we have been working with the team on the ground with them for some time on this project. It was a competitive process, so being able to succeed in being appointed on all 3 districts is a fantastic achievement by the team. And the districts will all be delivered in phases. We've got to get through planning approval with the local community in each phase, but we're well down the path on the first one. We're expecting earnings from the first component, which is likely to be a build-to-rent, or a multifamily component in U.S. parlance, to contribute earnings in FY '21. And then we'll look at how we can get through execution productively. Google is a fascinating client. And given the volume of what they're looking to do, subject to planning approvals, they are looking at highly efficient productivity methods to make sure that we can move through the whole backlog fairly quickly, and that's our aim.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [24]

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And just finally a question, perhaps for Tarun in terms of the CPPIB mandate in London for resi for rent. Just your current thinking, please, on the potential to activate more buildings as part of that mandate. Is that part of your FY '20 thinking, or does it potentially fall into FY '21?

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Tarun D. Gupta, Lendlease Group - Group CFO [25]

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Yes, Ben, we've got another couple of buildings getting ready in terms of planning approvals and production ready. We're doing some early works already just preparing those sites for sale. Obviously we'll be having conversations with CPPIB as per our agreement with them. And timing-wise, I can't give you exactly when, but it is imminent. And we are working through, as I said, getting the approvals lined up, and the preconstruction, contract pricing and things like that. The build to rent sector, despite the Brexit headwinds, the underlying fundamentals in London remain pretty solid in terms of rental support yields and rental growth, so we remain confident in that product.

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Operator [26]

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(Operator Instructions) Our next question comes from Grant McCasker from UBS.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [27]

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Steve, just one question. You outlined where your near-term commercial profits could come from. In regard to development JVs, when you -- sort of what projects would you look at? And would you look at some sort of the longer-dated larger projects, would you look at introducing a capital -- or sorry, a development partner in those throughout FY '20?

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [28]

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Without putting a time frame on it, obviously we look at every project on a case-by-case basis, but we have significant interest already from a number of partners. As you expect -- as you would expect, when we announce a major project, there's usually a fair bit of inbound inquiry, and that's happened in relation to a number of the projects we've announced recently. And we are engaging with 1 or 2 of our longer-term partners as to what the right approach to bringing their capital into projects is. It's always a risk-return tradeoff for us. So clearly, it's a very big pipeline which we can't do on balance sheet. As we grow, we'll obviously be able to absorb more and more on balance sheet ourselves, but in the meantime, we determine what the best -- what we think the best time is to bring in investors and we make that on a case-by-case basis. I think the build-to-rent funds that we've launched in the U.K. and the U.S. have -- are really important additions to our portfolio because it gives us a bit more diversity in making those decisions as well, and obviously bringing earnings forward rather than doing everything in a build-to-sell fashion which historically we've done.

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Operator [29]

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(Operator Instructions) There are no further questions. So I will pass to Steve, if he has any closing comments.

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Director [30]

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Thank you, everybody, for attending. And obviously we will be now undertaking our usual road show of the results here and internationally. Thank you for your support in what has obviously been a challenging year, but as we've said, our pipeline looks fantastic. And I think our outlook looks very strong in terms of delivering longer-term earnings.

So thank you.