Lendlease Annual Report 2022

Performance and Outlook 61 Development segment Key financial and operational metrics FY21 FY22 Operating EBITDA ($m) 469 181 Operating Profit after Tax ($m) 342 111 Invested Capital ($b) 1 4.4 5.4 Work in Progress ($b) 14.5 18.4 Commencements ($b) 2 5.6 5.9 Completions($b) 3 3.8 2.5 Pipeline ($b) 4 113.6 117.0 1. Securityholder equity plus gross debt less cash on balance sheet. 2. Project end value on product commenced during a financial period (representing 100% of project value). Subject to changes in delivery program. 3. Project end value on product completed during a financial period (representing 100% of project value). 4. Total estimated end value (representing 100% of project value). Performance The Development segment delivered EBITDA of $181m, down significantly from $469m. 1 COVID adversely impacted the timing and profitability of projects during the year while weather disruptions suppressed the performance of the Communities business. The prior year profit included contributions from the development joint ventures formed on One Sydney Harbour, Towers One and Two. They generated approximately $325m in EBITDA, including the uplift on our retained interest of 75 per cent. The decision to improve earnings quality by changing our approach to joint venture projects delayed expected profits. The subdued operating performance was reflected in a deterioration in returns. Return on Invested Capital of 2.2 per cent was at the lower end of the expected range of 2-4 per cent expected for FY22 and below our target range of 10-13 per cent. The divestment of the remaining 20 per cent interest in our Sydney Place development, along with progress on both leasing and construction delivery milestones, was the largest contributor to the result. Origination fees following financial close on both the North East Link and Frankston Hospital Public Private Partnerships also contributed to EBITDA. We completed $2.5b of developments, down from $3.8b in the prior year, comprised of $2.0b urban projects and $0.5b Communities. Across our urban portfolio, we completed both apartments for sale and rent buildings at Lakeshore East, Chicago, two office campus style buildings at Milano Santa Giulia and the retirement village in Shanghai. The Australian Communities business generated EBITDA of $16m, down from $42m 1 . Planning and weather delays contributed to the decline in settlements from 2,228 to 1,478 lots. Further recovery in commencements, which are running well ahead of completions, provides us with the confidence that operating momentum will translate into improved financial performance. Commencements of $5.9b, including a strong recovery in H2 FY22 of $4.4b, were up from $5.6b 1 providing a clearer pathway for completions to achieve our $8b annual target going forward from FY24. Our apartments for rent project at 1 Java Street, New York commenced against the backdrop of an improved outlook for the inner-city rental market. We are now underway with the third and final residential tower at One Sydney Harbour, Sydney. The Boston Life Sciences project commenced, along with office developments in Singapore, London and Sydney. In addition, we commenced phase one of the data centre in Tokyo. Lot sales across Australian Communities rebounded from 1,940 to 3,114 1 as we worked through planning and launched new projects. Invested capital rose from $4.4b to $5.4b 1 as development expenditure accelerated ahead of higher completions. Key projects utilising additional capital include: One Sydney Harbour; The Exchange TRX, Milan Innovation District and the Australian Communities business. The increase in invested capital is net of a $0.2b reduction related to the impairment of a small number of development projects. Outlook The Return on Invested Capital for the Development segment is expected to be in the range of 4-6 per cent for FY23. The significant operating momentum we carry into the new financial year, reflected in higher commencements and a record amount of Work in Progress, will drive a recovery in both completions and profit. However, neither will be at a sufficient level to derive the full scale benefits from our development platform. In addition, the change in approach to our joint venture projects has shifted the timing of profit recognition. As a result, returns in FY23 will remain well below our target of 10-13 per cent. The development pipeline rose from $113.6b to $117b 1 with additional projects and increased scope on existing projects more than offsetting completions and the removal of a few underperforming projects. Our $3b joint venture with Singtel was added to the pipeline. The project comprises two premium grade workplaces totalling approximately 110,000 square metres. Our Kinma Valley community project in South East Queensland received planning approval, adding $0.7b to the pipeline. Master planning and pricing improvements across our existing urban and communities' projects generated an uplift of more than $5b to the pipeline. The conversion of the already secured pipeline is critical for achieving our annual completion target of more than $8b. While this alleviates the need for significant origination, we will continue to pursue attractive opportunities with emphasis on our Asian and Australian cities. Work in Progress, the lead indicator for future completions, has risen to a record $18.4b. Approximately $4.5b is expected to complete in FY23, including Sydney Place and our apartments for sale project at 100 Claremont, New York. The Australian Communities business is recovering with more than $1b of presales carried into the new financial year. Consequently, we are targeting the lower end of our 3,000 to 4,000 settlement range for FY23. We remain on track to meet our more than $8b completion target in FY24. Projects that underpin this level of completions include residential Towers One & Two, One Sydney Harbour, the Melbourne Quarter Tower and TRX in Kuala Lumpur. Maintaining this completion target will require Work in Progress of more than $20b. This milestone is expected to be reached in FY23, driven by expected commencements of approximately $8b. 1. Comparative period the year ended 30 June 2021.