Lendlease Annual Report 2021

Global Chief Executive Officer's Report Core Operating Profit after Tax rose by 83 per cent to $377 million while Earnings per Security rose by 60 per cent to 54.8 cents for a Core Operating Return on Equity of 5.4 per cent. While an improved performance compared with the prior year, the Core business continued to be adversely impacted by COVID. The Development segment experienced production delays, with ongoing impacts on leasing and sales across some of our active projects. The lockdowns in London affected the performance of our recently completed residential for rent buildings at Elephant Park. Nonetheless, several key initiatives were progressed including an investment partner being secured for the first two residential towers at One Sydney Harbour. These initiatives drove an improvement in Development ROIC to 7.2 per cent, although returns remain below target levels. Construction activity was constrained by delays in the commencement of new projects, site shutdowns and lower productivity. The impact of social distancing protocols across our sites was reflected in a 16 per cent decline in revenue compared to a 9 per cent decline in hours worked. Despite pandemic impacts, we delivered a solid result with the EBITDA margin rising to 2.7 per cent. The Investments segment generated a return on invested capital of 5.9 per cent, just below the target of 6-9 per cent. Management earnings were resilient, although returns on the Group’s investment portfolio were also impacted by disruption across underlying assets. While our financial performance was below target levels, we achieved substantial progress on our strategic priorities; a number of new development projects and investment partnerships were secured and a number of strategic divestments completed. Strategy The cornerstone of our strategy is to create value through the best urban precincts in key global gateway cities. Our strong track record in delivering best in class placemaking and sustainable outcomes has helped us be the global I’m honoured to present my first report as Lendlease’s Global CEO. Upon assuming the role, my first task was to listen: to our customers, investors, and our people. Those interactions reinforced my conviction in the fundamental strength and culture of the Group. However, there is more we need to do to unlock our full potential. urbanisation partner of choice and underpins our goal for ongoing strong growth in the Investments platform. Our gateway cities strategy is simple, the most desirable cities will continue to be the driving force of economic, social and cultural life. We have unique insights into the likely evolution of the urban landscape given our global reach and capabilities. Through the places we design, build and manage, we aim to create destinations where people want to be and address urban challenges. Creating value for future generations A decade from now the world will be a very different place, with the impacts of climate change even more evident. That’s why the actions we take now have that future very much in mind. The cities in which most of us now live – including our homes, the places we work and where our children go to school – contribute about 40 per cent of global greenhouse gas emissions. This means our industry has a unique opportunity to act. To support our industry leading carbon targets, Lendlease is phasing out diesel and gas and increasing our use of renewable energy. Our Australian Building business has provided carbon neutral construction for three consecutive years and 100 per cent of our construction projects in Chicago are powered using renewable electricity. We are collaborating with supply chain partners, tenants and residents to achieve absolute zero carbon by 2040. Business review Shortly after commencing my role, I initiated a wide ranging business review. While it is yet to complete, some preliminary findings have been reached. Importantly, the Group’s strategy and strategic priorities have been confirmed. The work to date has been directed towards the organisation and management structure and a review of the development operations. The revised organisational structure is designed to derive the full benefit of being a multinational company with a more consistent operating model across all regions. This will facilitate the Group in achieving its strategic objectives and realise significant cost savings. The review of the development portfolio reaffirmed its underlying strength, supported by a capital efficient business model. However, a small number of projects have been identified where a material change in strategy is under consideration. We expect both the Group’s development production and return targets to be met by FY24. Outlook FY22 is a reset year for the Group as we face the future with a more streamlined organisation, focus on our core strengths and address COVID impacts that have temporarily challenged the key tenet of our strategy. As a result, we expect core operating returns for both the Development and Investments segments, along with returns for the Group to be below target. Despite this, I am incredibly optimistic about the future of the organisation. We are a great company with placemaking and origination capabilities that are world leading. Our success internationally is testament to our strategy and the depth of talent we have developed and attracted. I believe we will create lasting securityholder wealth while delivering on our commitment of leadership in health, safety and sustainability. On a final note, my thanks to our Board, employees, customers, investment partners, securityholders and financiers for supporting Lendlease throughout the year. Tony Lombardo Global Chief Executive Officer Lendlease has navigated a challenging year in the face of the COVID pandemic. My commitment is simple: to create value for all those that interact with us and make a positive contribution to society through the places we create. Our first step is to simplify the business and adopt a more consistent approach across the organisation to provide better transparency. This will help us identify the areas that create the most value, and importantly, those that do not. This is the key to creating wealth for our securityholders, who have endured a difficult period. Health and safety Getting our people home safely each day remains our highest priority. Tragically, two employees of subcontractors lost their lives on Lendlease projects during the financial year. A partial roof collapse at Curtin University in Perth and an accident during elevator fit out works at the Setia City Mall in Malaysia resulted in a loss of life. We extend our deepest condolences to the loved ones of both men. For more than 20 years we have transparently reported safety data across any operation where we have a presence around the world, regardless of who has statutory responsibility. Given the nature of recent incidents, we are sharing our learnings and advocating to industry to bring about lasting changes and credible, transparent reporting. In 2008, we introduced Global Minimum Requirements (GMRs) to define the Lendlease way for managing health and safety. The application of our GMRs has been reflected in an improved safety performance review across the past decade. But there is no room for complacency. This year, we released the fourth edition of our GMRs which incorporates updated work practices, lessons learned over the last five years, and a specific focus on the mental health and wellbeing of our people. Financial performance Lendlease reported a Statutory Profit after Tax of $222 million, including a loss of $181 million for the Non core segment and $26 million of property revaluations in the Investments segment. Lendlease Annual Report 2021 A Year in Review 9 A sense of place 8