Lendlease Annual Report 2022

Performance and Outlook 59 Group performance continued Portfolio Management Framework Target FY21 FY22 Total Group Metrics Core Operating ROE 8-11% 5.4% 4.0% Distribution payout ratio 1 40-60% 49% 40% Gearing 10-20% 5.0% 7.3% Core Business EBITDA Mix Investments 35-45% 30% 61% Development 40-50% 51% 23% Construction 10-20% 19% 16% Core Business Segment Returns Investments ROIC 2 6-9% 3 5.9% 9.7% Development ROIC 2 10-13% 3 7.2% 2.2% Construction EBITDA margin 2-3% 2.7% 2.0% Segment Invested Capital Mix Investments 40-60% 45% 40% Development 40-60% 55% 60% Regional Invested Capital Mix Australia 40-60% 39% 33% Asia 10-25% 19% 22% Europe 10-25% 23% 25% Americas 10-25% 19% 20% 1. Distribution payout ratio has been calculated on Core Operating Earnings. 2. Return on Invested Capital (ROIC) is calculated using the Operating Profit after Tax divided by the arithmetic average of beginning, half and year end invested capital. 3. Through-cycle target based on rolling three to five year timeline. Outlook The Group enters the new financial year with significant operating momentum, providing confidence in the Create phase of our five-year roadmap. While our integrated model enables a high degree of control regarding executing our strategy, we will be influenced by the external environment of higher inflation and interest rates. The Return on Invested Capital for the Investments segment is expected to be in the range of 6-7.5 per cent for FY23, the lower half of our target range. While the urban development pipeline is expected to continue to provide the predominant source of future growth for the investments platform, new initiatives will be pursued selectively alongside our investment partners. The Return on Invested Capital for the Development segment is expected to be in the range of 4-6 per cent for FY23. Higher commencements and a record amount of Work in Progress are driving a recovery in both completions and profit. However, scale benefits will not be achieved and the revised approach to our joint venture projects is anticipated to continue to defer profits on some projects in the near term. As a result, returns in FY23 will remain well below our target of 10-13 per cent. We remain on track to meet our $8b completion target in FY24, along with the Return on Invested Capital target of 10-13 per cent. Anticipated commencements, along with our assessment of project fundamentals of current Work in Progress, provides confidence in achieving both the completion and return targets. The EBITDA margin for the Construction segment is expected to be in the range of 1.5-2.5 per cent for FY23, potentially lower than our target range of 2-3 per cent, due to ongoing disruption from the pandemic, cost pressures and supply chain constraints. These risks have been well managed to date but their persistence is likely to impact performance in FY23. COVID impacts across the Group Segment Impacts Investments Performance was disrupted, although improved relative to FY21. • Retail asset management fees recovered, but were partly offset by a normalisation of expenses • Income from the Group’s investment portfolio recovered, although remains below pre-COVID levels • Extended stabilisation periods were experienced on recently completed assets • While there have been some impacts to income, real estate valuations were resilient with a $74m (pre tax) increase in the book value of the Group’s coinvestments. Development Activity and profitability were affected. Delays in converting opportunities across the Group’s urban pipeline included: • Weaker demand for new apartment product • Population declines across many gateway cities impacting underlying real estate demand • Weaker tenant demand and investment partner appetite in the office sector • Settlement delays on completed apartment product • Deferral in completion dates of projects in delivery e.g The Exchange TRX There were also some positive impacts: • Demand and pricing for luxury apartments • Government stimulus measures have boosted activity for new detached housing. Construction Impacts to origination and revenue. • Productivity disruption related to Government mandated shutdowns and social distancing protocols • Projects put on hold in some markets; delays in securing and commencing projects • Cost management measures mitigated the impact on margins • Public sector activity has increased including the securing of several social infrastructure projects.