Lendlease FY19 Results Transcript › - › media › llcom › investor...Aug 19, 2019 · Milan...
Transcript of Lendlease FY19 Results Transcript › - › media › llcom › investor...Aug 19, 2019 · Milan...
LENDLEASE 2019 FULL YEAR RESULTS TRANSCRIPT 19 August 2019
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Presentation
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 will then be available to take questions.
Lendlease’s long term value is driven by five focus areas that drive our approach to create
economic, safe and sustainable outcomes for our customers, partners, securityholders and
people. As today’s briefing focuses primarily on the financial, I’ll first touch on the non financial
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
organisation.
The frequency rate for Lost Time Injuries was 1.8 and the percentage of operations without
critical incidents was 90 per cent. 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 per cent of leadership positions in our organisation are held by women
and three of our nine Board Directors are female. For the second year running, we have been
named a Platinum Employer by the Australian Workplace Equality Index, recognising the work
we do to promote LGBTI inclusion.
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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 two 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 five years the Fund has achieved this
ranking.
Turning to slide 5.
We announced at the HY19 result the decision that the Engineering and Services business is
non-core and would be separated from the Group. A comprehensive strategic review concluded
that this decision is in the best interests of our employees and securityholders and allows both
Lendlease Group and the Engineering and Services business to focus on their core competitive
advantages.
First to the impact of the non-core 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 three Engineering projects with the estimated cost of
completing these projects incorporated within that provision.
A brief update on the three projects.
Gateway Upgrade North has been operational since March 2019.
The other two projects, Kingsford Smith Drive and NorthConnex, are both more than 85 per cent
complete and are due to finish in calendar year 2020.
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Works on Kingsford Smith Drive that were unaffected by the re-design 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 two 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 per cent 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 per cent 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.
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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 securityholders.
At the half year results we announced a preliminary estimate of future restructuring costs
associated with the separation of $450 million - $550 million pre tax. 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 urbanisation in gateway cities and we aim to be the
urbanisation partner of choice. Our ability to deliver across all aspects of major urbanisation
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 six key trends which drive our
business model helps us create great places which make a positive contribution in meeting the
world’s significant urbanisation 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 82.4 cents.
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Distributions of 42 cents per stapled security represent a payout ratio at the midpoint of the 40 –
60 per cent 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 per cent, towards the upper end of our
10-14 per cent target range.
Origination was strong with the Group’s development pipeline now approaching $100 billion
after securing four major urbanisation projects, one of which was secured post balance date.
Development ROIC of 11.6 per cent was underpinned by strong apartment earnings across a
range of urbanisation projects, the completion of the office precinct at Paya Lebar Quarter and
the formation of the residential investment partnership in the US.
The core construction margin of 2.2 per cent was generated on $9.7 billion of revenue.
The Investments ROIC of 10.8 per cent 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 urbanisation. Securing
four 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 three 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 –
15 year timeframe.
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At almost $30 billion, we now have a scale urbanisation platform in the US which has been
achieved within five years of extending the integrated model to that market.
In FY19, three major urbanisation 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 two projects valued at c.$17 billion in the UK,
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 at Barangaroo, introducing two 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 am pleased to also note that we have reached a resolution with Infrastructure NSW on the
Barangaroo sightlines 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.
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Our development joint venture with ADIA saw the completion of the 83,000 square metre 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 US$1 billion in the data centre 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 urbanisation 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 urbanisation
capabilities, which are increasingly being recognised as world leading.
Five years ago we had an urbanisation pipeline of $25 billion comprising seven major projects.
At $81.2 billion, it is now more than three times 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.
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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 FY14, 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 urbanisation pipeline
is delivered.
I will now hand over to Tarun.
Tarun Gupta: Thanks Steve and good morning everyone.
Turning first to our Financial Performance for FY19 on slide 11.
As Steve noted, the Engineering and Services business is non-core 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 per cent 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 per cent on strong apartments for sale settlements, while the
current urbanisation projects in Asia and the Americas made material contributions to earnings.
There were 1,623 apartments for sale settlements in the year, up significantly on the 1,314
completions in the prior year.
Our Darling Square project in Sydney was the largest contributor. We settled 100 per cent of the
967 apartments across six buildings, generating $1.3 billion in revenue at a very healthy margin.
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Collins Wharf 1 in Melbourne completed and 85 per cent of the apartments had settled by 30
June. Based on our experience from the last few completed buildings in Victoria Harbour, we
expect this building to fully settle in FY20.
The other significant contributor was West Grove at our Elephant Park project in London.
The default rate remained below our long term average in FY19. In the current cycle we have
delivered approximately 6,500 apartments with a default rate of just 1.2 per cent.
There was a slight delay to the construction program at our Clippership Wharf project in Boston.
Three buildings were scheduled to complete towards the end of FY19. They will now complete
in the first half of FY20.
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 two thirds
occupied despite still being early in the stabilisation 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
recognised on a per cent complete basis. Both the residential and retail components remain on
schedule to complete in FY20.
The residential investment partnership in the US acquired three 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 FY19 target of 2,500 lots.
The Construction segment delivered EBITDA of $211 million at a margin of 2.2 per cent.
Investments EBITDA of $489 million was strong. However, it was lower than FY18 which was
driven by substantial gains in underlying asset values. This was due to three key reasons.
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First, our result last year included a strong uplift in the value of the equity investment in the US
Military Housing operations;
Co-investment revaluations of 11 per cent of Core operating EBITDA compared to 7 per cent in
FY19;
And finally, last year we had a higher ownership level with our Retirement Living business.
Following the sell down we now own 75 per cent of that business, and our return on capital was
7.5 per cent 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 per
cent over the last five 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 FY19, the cash flow coverage was 36 per cent. The key driver of this was the payments on
our PLLACes 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 PLLACes investors on settlement. In FY19 $475 million matured with the present value of
that amount collected in FY17. Adjusting for this, underlying cash flow conversion was above 90
per cent.
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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 urbanisation projects
with $2.1 billion in residential for sale settlements, although the cash inflow was $1.4 billion
given the PLLACes payment and revenue recognised on joint ventures. The substantial
reduction in the Group’s stake in the office precinct at Barangaroo and the establishment of the
US 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 buy-back 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 per cent 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 per cent to 4.0 per cent during the year while average debt maturity
improved to 4.8 years with no material debt expiries until FY22.
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.
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The interest coverage ratio was 8.8 times.
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 10-20 per cent range in FY20.
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 per cent 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 mid- point,
Investments top end and Construction lower end of their respective ranges.
I will now hand back to Steve for an operational update.
Stephen McCann: Thank you Tarun.
Turning to Development on slide 16.
Development EBITDA was $793 million driven by apartments for sale settlements and strong
contributions from both Asia and the Americas.
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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 a 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 urbanisation 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 recognised on settlement. The exception to that is where we establish
Development joint ventures that provide funding flexibility and may also crystalise 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 US
residential investment partnership.
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We have more than 3,000 apartments for rent currently in advanced planning across seven
urbanisation projects. We expect these to be significant earnings contributors.
The Communities pipeline remains strong, although we expect another challenging year in
FY20.
Moving to commercial development on slide 18.
Six buildings across four office developments completed during the year.
Paya Lebar Quarter in Singapore is performing well with 75 per cent of the three office towers
leased and more than 80 per cent of the retail mall, due to complete in FY20, now let.
We also completed office buildings at 839 Collins Street, Melbourne, One Melbourne Quarter
and 25 King in Brisbane.
The pipeline continues to build with approximately 500,000 sqm of commercial space added in
FY19.
That provides a strong position as we enter FY20.
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 three 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.
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In the US, 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 on to our core Construction segment
The Construction segment delivered EBITDA of $211 million. The EBITDA margin of 2.2 per
cent was in line with the 2-3 per cent 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 per cent to $4.1 billion, resulting in EBITDA of
$126 million at a margin of 3.1 per cent. The margin over the last five years has averaged
approximately 4 per cent with the FY19 margin impacted by the revenue mix.
New work secured was strong at $4.5 billion.
Revenue from the Americas was down 9 per cent to $4.3 billion, reflecting weaker activity in Los
Angeles and Chicago, two of our five target cities. EBITDA of $46 million and margin of 1.1 per
cent 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.
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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 per cent of this backlog
will generate future revenue and margin for the Construction segment. Currently about 20 per
cent 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 on line.
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 per cent during the year and our urbanisation
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 FY18.
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 per cent 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 per cent, with our growth in funds under management driving a higher fee base.
The asset management businesses continue 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 unrivalled and our success at securing
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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 have 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 urbanisation 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 non-core business with a sale process underway.
As we work through the separation we remain committed to delivering the best possible
outcome for our clients, employees and securityholders.
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 urbanisation projects.
With that, I’ll open it up for questions. The webcast is not two-way so we will only be able to take
questions over the phone.
Stuart McLean: (Macquarie Group, Analyst) Good morning. First question will 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? How confident are you on an outcome for
sale and well 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 McCann: Yes so on the sale process as I've said that's been initiated. 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 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.
Stuart McLean: (Macquarie Group, Analyst) Then maybe just on the provision and you
mentioned that you did a complete review of the entire portfolio. I was wondering did that
include Melbourne Metro in that review and does Melbourne Metro and WestConnex for that
matter need to be over 20 per cent complete before you were to take a provision if things
weren't going as well as expected?
Stephen McCann: So the review 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 per cent
rule is we don't book earnings until we achieve 20 per cent. In the circumstances of when we
assess whether or not to take provisions though, we have regard to the status of all the projects
as they are today.
Stuart McLean: (Macquarie Group, Analyst) Okay perfect, understand thank you. Then
maybe so 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
colour on how you see that coming through. Can you just provide a little bit more detail there
again on your thoughts and how quickly this $100 billion urban regen pipeline can start dropping
through into the P&L?
Stephen McCann: 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
we will try and give the market some pretty clear direction as to which projects are likely to come
online when.
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As I mentioned there's a mix of different asset classes; there's also a mix within the residential
asset class of build to rent versus build to sell. The 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'll 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.
Stuart McLean: (Macquarie Group, Analysis) So you mentioned the build to rent 17,000
apartments, on the commercial office side are they the sorts of earnings that you can forward
sell and bring in at first?
Tarun Gupta: Yes hi Stuart it’s Tarun here. Yes we've got almost $25 billion worth of
commercial assets in the backlog now. As you know with our capital partner support we can
forward sell those once we get planning and some pre-commitment. So again we're working
through that pipeline and as planning is progressing on these newly secured projects we'll come
back and provide some more clarity.
Stuart McLean: (Macquarie Group, Analyst) Thank you.
Operator: Our next question comes from Sameer Chopra from Bank of America. Please go
ahead.
Sameer Chopra: (Bank of America, Analyst) Morning. I have three questions. So I'd like to
start off with where Stuart left off. You know the $100 billion of Development pipeline I think you
mentioned 50 per cent 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?
Stephen McCann: 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
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we've had a very good last six months in terms of completion of settlements and other activities,
that has actually helped manage 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 cent 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. 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.
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. It's not a case of putting strain on the corporate balance sheet.
Tarun Gupta: Sorry Sameer, just Tarun here again. Just to add to that, you know we've
identified in the backlog now about $50 billion of investment grade product in our commercial
and resi for rent pipeline. With our capital partner support obviously we have a lot of flexibility on
how we structure those sell-downs, always making sure we can meet our ROIC targets that
we've communicated to the market. So we have a lot of flexibility on balance sheet and also
with access to third party capital.
Sameer Chopra: (Bank of America, Analyst) Just on that, you mentioned that you had 90 per
cent cash conversation after some adjustments. Could you just walk us through the math behind
that again and how you get to that 90 per cent cash conversion? Then I have just one last
question.
Tarun Gupta: Yes Sameer, so it's the underlying cash flow is $316 million. If you add $475
million for PLLACes which we return to those investors this period then you end up at over 90
per cent of reported EBITDA.
Sameer Chopra: (Bank of America, Analyst) Cool. 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
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billion of Engineering projects, why go down that place when you know you're looking to sort of
wind down the Engineering segment or exit it?
Stephen McCann: Yes, so when we undertook our review which we announced the outcome of
in February, that review looked at a whole series of things including the risk profile of the
business, the outlook for the market 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.
There are a whole range of different activities within that sector. So our business is very much
focused on the lower risk end. We won't have the appetite for risk that will lead us to originate
complex lump sum projects. So we are being selective. We do have a business which is a going
concern and we do have employees and 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've 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.
Sameer Chopra: (Bank of America, Analyst) Right, thank you.
Operator: Our next question comes from Ben Brayshaw from JP Morgan. Please go ahead.
Ben Brayshaw: (JP Morgan, Analyst) Good morning Steve, Tarun. Congratulations on a
strong second half result. Could you talk about the strategy please for building One at One
Sydney Harbour Barangaroo. I'd just be interested in your thinking about whether you will look
to undertake 100 per cent, or potentially a joint venture interest on that project? Secondly, your
target level of presales please; should we be assuming 50 per cent to circa 70 per cent presold
prior to committing to that project?
Stephen McCann: Yes, so we - in relation to One Sydney Harbour, as you've rightly pointed out
there's more than one building. It's the first tower that we're focused on at the moment. There
are three towers, two high-rise ones, and one medium-rise tower.
The first tower is 317 units, and we do expect to launch that very shortly. We will target the
usual presales target, and that range of 50 per cent number that you flagged we think is
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probably appropriate. When we did start making enquiries 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, to
make sure that that proceeds well with a higher level of security than we would typically seek,
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.
Tarun Gupta: Ben, in terms of funding again - hi, Ben, it's Tarun here - just funding the tower,
obviously we've got to get through presales. We are already in the ground building the
basement after remediating the site. Then some point in the future we will initially fund with the
balance sheet, but then look at whether we bring in a joint venture partner, or in fact we have
our PLLACes product, still those investors have had a very good experience in our pipeline over
the last three, four years. That remains also an option for us to explore. We are a bit far - there
is a bit of time to go before we reach those decisions.
Ben Brayshaw: (JP Morgan, Analyst) Okay, thanks. On Google, could you talk about the
activation plans for the project? Over what period of time would you expect initial phases to start
to contribute to Group earnings?
Stephen McCann: Yes, 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 a 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 three districts is
a fantastic achievement by the team. 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 multi-family component, in US parlance, to contribute to earnings in FY21. Then
we'll look at how we can get through execution productively.
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Google's 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.
Ben Brayshaw: (JP Morgan, Analyst) Thanks, Steve. Just finally, a question perhaps for
Tarun. In terms of the CPPIB mandate in London for residential-for-rent, just your current
thinking please on the potential to activate more buildings as part of that mandate. Is that part of
your FY20 thinking, or does it potentially fall into FY21?
Tarun Gupta: 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 will 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 pre-construction contract
pricing and things like that.
The built-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.
Ben Brayshaw: (JP Morgan, Analyst) Okay, thanks guys.
Operator: Once again, if you'd like to ask a question, please press star one on your telephone.
Our next question comes from Grant McCasker from UBS. Please go ahead.
Grant McCasker: (UBS, Analyst) Good morning, Steve. Just one question. You outlined where
your near-term commercial profits could come from. In regard to development JVs, when you
look - sort of what project would you look at, and would you look at some of the longer-dated,
larger projects? Would you look at introducing a capital - sorry, a development partner in those
throughout FY20?
Stephen McCann: Yes, without putting a timeframe 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.
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As you expect, when we announce a major project, there's usually a fair bit of inbound enquiry,
and that's happened in relation to a number of the projects we've announced recently. We are
engaging with one or two of our longer-term partners, as to what the right approach to bringing
their capital into projects is.
It's always a risk return trade-off 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 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 UK and the US are really important
additions to our portfolio, because it gives us a bit more diversity in making those decisions as
well. Obviously bringing earnings forward rather than doing everything in a build-to-sell fashion,
which historically we've done.
Grant McCasker: (UBS, Analyst) Okay, excellent. Thanks.
Operator: Just a final reminder, if you would like to ask a question please press star one on
your telephone.
There are no further questions, so I'll pass to Steve, if he has any closing comments.
Stephen McCann: Thank you everybody for attending. Obviously, we will now be undertaking
our usual roadshow 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.
End of Transcript