Lendlease Annual Report 2022

60 Lendlease Annual Report 2022 Investments segment Key financial and operational metrics FY21 FY22 Management EBITDA ($m) 1 165 141 Ownership EBITDA ($m) 2 111 356 Operating EBITDA ($m) 2 276 497 Operating Profit after Tax ($m) 213 361 Invested Capital ($b) 3 3.6 3.7 Funds Under Management ($b) 4 39.6 44.4 Assets Under Management ($b) 4 28.5 30.0 Investment Portfolio ($b) 5 3.5 3.5 1. Earnings primarily derived from the investment management platform and the management of US residential housing operations. 2. Returns excluding non-cash backed property related revaluation movements of Investment Property, Other Financial Assets, and Equity Accounted Investments in the Investments segment. 3. Securityholder equity plus gross debt less cash on balance sheet. 4. The Group's assessment of market value. 5. The Group’s assessment of market value of ownership interests. Performance The Investments segment delivered EBITDA of $497m, up substantially from $276m 1 . The recovery in performance was driven by several components of the segment with higher fund management fees, a recovery in underlying investment income and profits on divestments. Return on Invested Capital of 9.7 per cent outperformed both the anticipated range of 7.5-8.5 provided at the HY22 results and the segment target range of 6-9 per cent. Management EBITDA, derived from funds and asset management activities across the Group’s investments platform, was $141m, down from $165m 1 . Funds management EBITDA rose 25 per cent to $94m 1 . Revenue climbed from $145m to $172m, driven by base fees growing in line with funds under management and acquisition fees from investments in Asia. Higher expenses were driven by investment in resourcing to support the $11b in initiatives to underpin our growing platform, including the launch of new products. Asset management EBITDA of $47m is down from $90m 1 . The prior year includes fees from the $1.3b of redevelopment activity that was secured across the US military housing portfolio. Residential fees across the apartments for rent portfolio continued to rise while commercial asset management fees recovered on fewer abatements. Investment portfolio EBITDA was $356m, up from $111m 1 . Improved asset level performance supported a recovery in underlying investment income with an investment yield of approximately five per cent across the portfolio, up from approximately three per cent in the prior year. This included a recovery in earnings across our co-investment positions, including an improved operating performance from our Retirement Living investment. Profits from capital recycling initiatives included $167m pre-tax associated with the part divestment of the future asset management income stream from the US Military Housing portfolio. The Group’s investment portfolio is valued at $3.5b. The portfolio was steady against FY21 with the investment into an industrial portfolio joint venture and our participation in the Lendlease Global Commercial REIT capital raising broadly offsetting the Retirement Living divestment. The investment portfolio is well diversified, with exposure across the office, residential, retail, retirement and industrial sectors. Outlook The Return on Invested Capital for the Investments segment is expected to be in the range of 6-7.5 per cent for FY23, within our target range. Funds under management, assets under management and the investment portfolio are the key operating metrics that drive future financial performance. Growth in funds under management of 12 per cent 1 to $44.4b was underpinned by new partnerships and mandates, fund acquisitions and appreciating asset values. Additional funds include Real Estate Partners 4; an office partnership at International Quarter London; our industrial portfolio joint venture and acquisitions across the Australian Funds Management platform. In addition to the current funds under management, there is approximately $5b of potential FUM based on development projects currently in delivery via managed funds or mandates. This forms part of the $11b of investment partnerships that were established during the year. The Group’s urban development pipeline is expected to continue to provide the predominant source of future growth for the investments platform. The existing urban development pipeline includes approximately $64b of institutional investment grade product across commercial and residential for rent assets. Assets under management rose from $28.5b to $30.0b, primarily driven by foreign exchange rate movements. Fees will be lower in FY23 given our lower interest in the military housing asset management income stream. The Group’s investment portfolio of $3.5b includes approximately $1b in each of office and retail assets, $0.7b in residential and $0.5b in retirement, with the remainder in industrial. The Group’s strategy is to significantly grow its investment portfolio over time. Growth is expected to be derived from retaining a proportion of completed assets from the development pipeline and investing alongside partners through the launch of new products. Key initiatives progressed in FY22 include the launch of a value-add diversified fund; a partnership to develop the office precinct at International Quarter London; a US Life Sciences partnership; and an Asian Innovation partnership. 1. Comparative period the year ended 30 June 2021.