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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 midpoint,

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


21

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


22

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.


23

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.


24

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

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