Ladies and gentlemen, thank you for standing by. Welcome to the Lendlease's 2024 Half Year Results Briefing. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone keypad and wait for your name to be announced. I must advise you that this call is being recorded today, Monday, 19th of February, 2024. I would now like to hand the call over to Mr. Tony Lombardo, Global Chief Executive Officer. Thank you, Tony. Please go ahead.
Good morning, and thank you for joining the Lendlease 2024 Half Year Results Presentation. I'm Tony Lombardo, Global Chief Executive Officer and Managing Director of Lendlease. Joining me today, Simon Dixon, Global Chief Financial Officer. Sitting here at Barangaroo in Sydney, we're on the land of the Gadigal people, and I extend my respect to their elders past and present. I'll provide an overview of our Half Year 2024 results. Simon will then present the financials before handing back to me for the outlook. We'll then open up for questions.
We're on a journey to transition the group to an investments-led business with a higher recurring earnings base that can better withstand market cycles. We're not there yet. While we've made substantial progress against a number of our objectives, market conditions have not been favorable.
This has negatively impacted our ability to recycle capital out of the Development segment into our Investment segment and drive higher recurring earnings. Real estate capital markets have been particularly impacted in the Americas and Europe. JLL and CBRE data shows global transaction volumes in calendar 2023 were less than half of their 2021 peak. In Europe, there is an uncertain macroeconomic outlook, with capital markets remaining slow. Similarly, in the Americas, the outlook for commercial real estate in the sectors we are active continues to be challenged, with a lack of transaction activity. Prioritizing security holder interests by realizing the value we have created in our assets will always come ahead of achieving short-term metrics. We're continuing to take the necessary steps to complete our investments-led transition as we set the business up for future success.
We've progressed the twin objectives of simplifying the group and recycling capital, with the announced AUD 1.3 billion sale of the 12 community projects. The sale price represents a 20% premium to book value and is expected to complete in the second half of FY 2024, with approximately half of the cash proceeds to be received upon completion. Anticipated peak development capital was reached during the period, with a number of key projects nearing completion, including the luxury apartments at Residences One, Barangaroo, which will deliver profits and strong net cash inflows in the second half of FY 2024. While debt was elevated in the first half, we have successfully protected the balance sheet through the cycle, with a clear pathway to deleverage in the second half. In November last year, we opened one of Kuala Lumpur's most extensive urban retail centres, the Exchange TRX.
The asset is 96% leased and trading well. We remain on track to achieve approximately AUD 60 million in pre-tax cost savings in FY 2024, with 90% of the previously announced cost savings actioned in the first half. In addition to the risk improvements made to our construction portfolio in FY 2023, we decided to exit our West Coast and central operations in the Americas. The group's earnings and balance sheet are closely tied to transaction timing. Our first half operating performance reflects the difficult trading conditions, slower first-half activity, and expected second half skew to earnings. Core operating profit after tax was AUD 61 million for the period. Core operating earnings per security was AUD 0.08, equating to a return on equity of 1.9%. The interim distribution of AUD 0.06 per security represents operating income from the trust during the period. The group recorded a statutory loss after tax of AUD 136 million.
There was an AUD 125 million downward revaluation of our property investments within the Investment segment, AUD 56 million of redundancy costs from business optimization initiatives, and an additional AUD 22 million of provision and related costs were taken in relation to the U.K. building remediation regulations. Gearing of 22.9% is above the top end of our target range. However, with high visibility on AUD 1.5 billion of near-term contracted and announced cash inflows, we anticipate it will reduce to at or around the midpoint of the 10%-20% target range by the end of FY 2024. Simon will talk to this in detail later in the presentation. There is a substantial amount of activity underway across our regions and in each of our segments. In Australia, the business is well positioned for the future, having executed a key capital recycling initiative in the period.
Across investments and development, leasing activity has picked up, and we continue to focus on builds as a core asset class for both segments. The construction business continues to contribute to our integrated model while also providing a strong backlog. In the Americas, we completed luxury residential apartments in New York at 100 Claremont alongside partner Daiwa House and residential assets in Chicago that continue to grow our build-to-rent investment portfolio. Changes in construction have refocused our business on the East Coast across the core asset classes of life sciences and healthcare, while in development, our first life sciences development forum topped out. In Europe, the final residential stage at Elephant Park is underway, and the final office stage has received planning approvals. At our Stratford Cross Precinct, the Turing Building, developed in partnership with CPP, topped out, and the building remains on track for completion next financial year.
In Asia, our landmark retail urban center, the Exchange TRX, opened while the residential towers in the precinct also topped out. The retail assets is one of Malaysia's largest at more than 200,000 square meters of gross floor area and contains a mix of luxury, high street, and other international brands. We remain active across all geographies as we position the business for a recovery in real estate capital markets. The group recorded a mixed result against key operating metrics. Funds under management were resilient. The directly held investment portfolio was modestly down due to revaluation impacts in planned asset divestments. Work in progress remained strong at approximately AUD 21 billion and is largely comprised of apartments for sale and rent, as well as workplace assets. Completions were up. However, the development pipeline reduced, reflecting the removal of the San Francisco Bay Area project.
Construction revenue was lower, while new work secured was up, driven by an increase in European activity. Backlog revenue remained solid and well diversified by client, sector, and geography. Moving now to slide 8. Our investment earnings are derived from funds and assets under management and contributions from our directly held co-investment portfolio. During a period of slower activity and revaluations across the industry, funds under management reduced only marginally. Assets under management increased 3%, driven by the completion of the Exchange TRX retail asset in Kuala Lumpur. The group's investment portfolio was down modestly to AUD 3.8 billion. Deployment of capital into APPF Retail was more than offset by the revaluation impacts and asset divestments, including the sale of Darling Square retail. The portfolio remains well diversified, with a primary weighting to workplace, residential, and retail assets.
The portfolio's performance improved during the period, generating a distribution yield of 3.6%, up from 3.3%. Stabilised assets in the portfolio generated a yield of 3.8%. This excludes assets that are yet to be fully yielding, such as 21 Moorfields in London. The group's development to core products derived from the urban development pipeline are expected to be the primary source of growth for the fund's platform, with more than 50% of the pipeline comprising investment-grade products such as build-to-rent and workplace assets. In addition to the current fund, there is more than AUD 6 billion of future-secured fund in delivery from development projects and a further AUD 4 billion of committed third-party capital to deploy. Turning now to the Development segment on slide 9. Work in progress, the lead indicator for future completions, is AUD 20.8 billion.
Consistent with our strategy to partner early on projects, more than 80% of projects in WIP have capital partners via either fund-through structures or joint ventures. There were $3 billion of completions during the period, including the retail component of The Exchange TRX, residential apartments at 100 Claremont in New York, and The Reed in Chicago was also completed. A key completion was the residential build-to-sale building at Elephant Park in London with existing partner Daiwa House. Planning was recently received post-balance date for the precinct's final office building. There has been an improved leasing activity across several workplace assets, including the first office tenant at Victoria Cross Over Station Development in North Sydney. The building is due to complete in the second half of FY 2025 and should benefit from the opening of the new Sydney Metro stations in 2024, connecting Chatswood and the Northwest with the Sydney CBD.
In Melbourne, two anchor tenants have been secured for the over-station development project, Town Hall Place. Further leasing has been secured at Melbourne Quarter Tower and at Blue & William, North Sydney. Well-located premium and A-grade assets with strong ESG credentials continue to be attractive for tenants. The strategic AUD 1.3 billion sale of 12 community projects was announced, with completion expected in the second half of FY 2024, subject to conditions precedent being met. The transaction is significant for capital recycling programs and supports our strategy to simplify the group and re-rate capital to the Investment segment. Operating performance for the communities business was impacted by planning approval delays, causing deferral of settlements to later periods. Lendlease has retained the benefit of these settlements and expects to book related EBITDA of approximately AUD 60 million in the next 12 months.
Turning to the outlook by the end of FY 2024, we expect the development pipeline to be less than AUD 90 billion. Development activity is expected to increase in the second half, including AUD 5 billion of completions and AUD 2 billion of commencements. This includes the luxury residential tower, Residences One, at Barangaroo. The tower is 98% sold, with the settlement process underway following practical completion. Moving now to slide 10 on construction. Further operational changes were made in the period as we seek to further improve the risk-return profile of the business. This includes exiting the West Coast and central operation in the Americas. The changes follow the action we took in FY23 to stop taking on residential-for-sale projects for third parties and construction projects smaller than AUD 150 million. New York new work secured was up on the prior period, corresponding period, led by an increase in European activity.
Americas and Australia are also meaningful contributors, with social infrastructure projects remaining the strongest sector at AUD 1.1 billion, followed by workplace at AUD 0.9 billion. The segment has a solid backlog revenue at AUD 8.3 billion. The business is preferred for AUD 11.8 billion in new projects across the key sectors of workplace, social infrastructure, and defence, with more than half of this coming from Australia. I'll now hand over to Simon to talk through the financials.
Thanks, Tony, and good morning, everyone. Starting with our financial performance on slide 12. Core segment EBITDA of AUD 283 million was down 20% with the lower contributions from investments and construction, partially offset by the Development segment. The Investment segment delivered EBITDA of AUD 120 million, down 39% on the prior corresponding period, which benefited from the divestment of the second tranche of the military housing asset management income stream.
Absent this transaction, underlying earnings in the half were up 1%. EBITDA was up 26% with the key contribution from a payment received in relation to the San Francisco Bay Area project. A gain of AUD 37 million was recorded following the opening of the Exchange TRX, reflecting completion and achieving leasing of 96%. This was largely offset by a AUD 28 million negative revaluation at Victoria Cross in North Sydney. Construction segment EBITDA of AUD 51 million was down 25%. The result was impacted by a AUD 17 million settlement relating to a project completed in the U.K. in 2007. Corporate costs were flat at AUD 76 million, with lower group costs offset by higher foreign exchange hedging costs of AUD 7 million. Underlying net finance costs increased due to higher average cost of debt and higher average debt balances.
This was partially offset by AUD 39 million pre-tax gain from a further buyback of the group's Sterling bonds. Excluding this benefit, underlying net finance costs would have been AUD 116 million. Tax expense was lower at AUD 8 million, primarily due to a higher proportion of profits being derived from the trust. Core operating profit after tax of AUD 61 million was down from AUD 105 million. The statutory loss after tax of AUD 136 million was primarily due to negative revaluation impacts on the property portfolio in the Investment segment, in addition to redundancy costs relating to business optimisation and an additional provision in relation to U.K. building remediation regulations. Moving to the segment performance in more detail on slide 13, starting with the Investment segment. Operating performance was lower, generating a return on invested capital, or ROIC, of 4.5% for the period.
This was primarily due to an absence of transactional profits and lower performance fees and acquisition fees versus the prior corresponding period and the ongoing costs of building out new platforms in Europe and the Americas. Excluding these new platforms, the investment's ROIC would have been approximately 6%. Management EBITDA from funds and asset management activities was down modestly to AUD 55 million due to lower fund and related fees, partly offset by higher asset management earnings. Co-investment EBITDA of AUD 70 million was up 11%, driven by improved yields in workplace and retirement living assets, as well as deployment of capital into the higher-yielding APPF Retail fund. Turning now to the Development segment on slide 14. The segment ROIC of 1.4% reflected an absence of transaction activity for the period.
A stronger second half is expected with AUD 7 billion of development activity, including more than AUD 5 billion of completions underpinned by Residences One at Barangaroo. EBITDA from urban development was AUD 103 million. The communities business generated EBITDA of AUD 9 million, with operating performance impacted by planning approval delays, which have shifted settlement profits to future periods. In the Construction segment, revenue was down due to lower activity in offshore markets. EBITDA margin of 1.7% was impacted 0.5% by the U.K. project settlement. In the established, at-scale Australian business, EBITDA margins in excess of 3% have been delivered. Moving now to net debt on slide 15. The increase in net debt to AUD 3.7 billion at the half includes AUD 1.1 billion of gross capital deployed across development and investments, reflecting peak development capital, which is expected to moderate going forward.
Non-core cash outflows for the period were AUD 0.1 billion, with a further AUD 0.4 billion of outflows estimated through to FY 2026 inclusive. Net cash proceeds of approximately AUD 1.5 billion are expected to be received in the second half from settlements at Residences One, Barangaroo, and first receipts from the sale of 12 community projects. These expected net cash inflows equate to a pro forma first-half 2024 gearing benefit of approximately 7% and provide a clear pathway to return the group to its target gearing range. There is also line of sight to a further AUD 1.1 billion of contracted and announced cash inflows expected in FY 2025 from final communities' sale receipts and settlements at Residences Two, Barangaroo. Turning over to slide 16, Capital. Our approach to capital allocation is focused on two key areas. Firstly, reweighting capital back to Australia.
Secondly, reweighting capital to our Investment segment from our Development segment, targeting 60%. There is substantial development capital residing in longer-dated projects which are currently not producing income. We are seeking to address this by redirecting a high proportion of development capital to WIP. This will require a careful balance between preserving security holder value, opportunity cost, and execution of strategic priorities as we navigate challenging markets. Moving to slide 17. While gearing is currently above the Group's target range, there is a near-term pathway to de-leverage and return to the target 10%-20% range. The Group remains in a sound financial position with AUD 1.6 billion of committed liquidity comprising AUD 0.6 billion of cash and cash equivalents and AUD 1 billion in available undrawn debt. The average debt maturity is 3.5 years, with no refinancing events in FY 2024.
Maintaining our investment-grade credit ratings remains a priority, and these were recently reaffirmed by both rating agencies last month. Now moving to slide 18, cost initiatives and further optimization. At our FY 2023 results, we announced a further cost-savings program of AUD 150 million pre-tax aimed at driving efficiencies while preserving business growth. More than 90% of cost initiatives were actioned in the period, and we remain on track to complete all necessary actions and achieve a AUD 60 million pre-tax benefit in FY 2024. I'll now hand back to Tony.
Thanks, Simon. Turning to slide 20. Our Investments-led transition remains on track, with no change to the overall strategic direction of the Group. Since our strategy was announced, we'll take material steps to simplify the business and increase productivity to set the business up for future success.
Our core focus to become an investment-led organization has seen fund growth of more than 20% to date, amidst difficult capital markets, including greatly reduced capital flows and valuation headwinds. We've also continued to build out our new investment platforms in Europe and the Americas with key appointments made. In development, we've realized value from the development pipeline and refocused the urban portfolio. Improving development return on capital remains a priority, as is the delivery of fund-generating investment product. We've simplified the group, with more than AUD 2.3 billion of completed and announced sales since FY 2021, including the most recent AUD 1.3 billion sale of a portfolio of community projects and further planned strategic divestments. We've simplified the construction business with changes made in FY 2023 and the first half of FY 2024 designed to reduce longer-tail risks and improve margins over time.
We've removed and announced a total of AUD 320 million per annum of gross savings and continue to focus on business efficiency and right-sizing operations to become an investment-led organization. Strong near-term cash inflows should put the business in a good position as it returns to its target gearing range in the second half, providing a solid foundation from which to further execute our strategy. We'll return to the market in late May to provide further detail on how we plan to accelerate the investments-led transition. Turning now to our final slide, the FY 2024 outlook. Core operating earnings are expected to improve in the second half of the financial year. However, the group has revised its expected FY 2024 return on equity guidance to 7%, reflecting lower certainty of transaction timing and higher execution risks given the challenging capital markets backdrop.
The group continues to forecast FY 2024 gearing at or around the midpoint of the 10%-20% target range. Across our segments, we're expecting in the second half a consistent performance from investments, a much improved performance from development, and a higher contribution from construction. Within development, a profit of AUD 130 million-AUD 160 million after tax is expected from the completion of the community sale. While in the actions we've taken through the first half, we remain on track to achieve the AUD 60 million of pre-tax cost savings in FY 2024. From a regional perspective, another strong full-year contribution is anticipated from Australia. A consistent performance from Asia is expected, while the financial performance in Europe and Americas continues to be impacted by ongoing challenging capital markets. The group will continue to prioritize security holder value ahead of transaction timing.
While there is potential earnings upside from certain planned transactions if they complete prior to year-end, challenging markets and operational risks remain. Thanks, and I'll now open up for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Sholto Maconochie with Jefferies. Please go ahead.
Good day, Tony and team. Just a quick question on the ROE, the 1% hit on the guidance. I understand you've got some one-offs in there. You've executed on the sale of communities. I'm just trying to see what that 1% drag is. Is there anything in particular that was dragging that down?
Well, there's a couple of things which I've talked through. I mean, in the second half, as we said, the capital markets today are running at lows. I mean, you look at capital markets broadly over the last 12 months, we've seen transactional activity drop by over 50%. So we're back to 2012. So the business plan was predicated on ensuring we did execute a number of those transactions during 2024. What I've called out today is I've said there's certain transactions which were still underway. The timing of those transactions may drop by FY 2024 or could push out into FY 2025. So that's the key reason that we've changed the guidance outlook.
Yeah. I think sort of just to add to that, we can't sort of point to one or two transactions. It's a number of transactions. We've taken a sort of a view based on probability.
So we believe the 7% is a pretty balanced indication of where we're at today.
If they did land this half, it could be 8%, potentially, if all the things like military housing, retirement, Ardor G ardens, etc. If things were on foot landed this year, it would have been 8% if you had it locked in by now.
So what we said is we've got a number of transactions currently underway. And if we do achieve some of those transactions - so say we did them all - we could easily get above that 7%. But based on today, on a risk balance and reward where we looked at the probabilities of certain things occurring, 7% is our expected ROE for the year.
Yeah. I think it's but if everything lands and in our business, everything doesn't land.
But if everything was to land, then there's earnings upside there, Sholto. I'll also point out that we do have operational risks that remain in our business and market risks as well, which would need to continue to keep under review.
And then just the next one from me, I'll limit to two. The AUD 150 equity investment into APPF Retail, was that the fund redemptions? And/or what was the rationale for that investment into the fund?
As we were just repositioning that fund, we made a decision to take on an additional investment in that. And now the fund has gone through its redemptions, and we're waiting for the last asset to settle in this period.
And was you taking an existing investor for that equity, or was it new equity?
It was just investment into it, so it was taking an existing.
As we've now got the redemption window cleared, when we get the final settlement of the final asset we sold.
Oh, great. Thanks very much, Tony. Thank you.
Your next question comes from Simon Chan with Morgan Stanley. Please go ahead.
Oh, good morning, Tony. Good morning, Simon. Hey, guys. My first question is just on the Victoria Cross. I noticed you had a AUD 20 million write-back of some sort in relation to that asset. From memory, Lendlease talked up about AUD 120 million of profits for that back in FY 2020. With this 28 million write-back, does it imply that upon the completion of the project next year in FY 2025, we should expect minimal profits upon completion, or is this completely not related?
So you are correct.
When we initially entered the joint venture, there was a profit recognition because we were using the old JV structures, which led to the accounting profits being booked on the inception of that joint venture.
I think just on that, though, Simon, it's important to note that the profit uplift as a result of the deconsolidation pertains to the 75% ongoing interest. So it's AUD 90, not the AUD 120.
Yeah. The AUD 120 was the 100% if you looked at it from that angle. The valuation, as always, all our Developments and our Investments, we look at the valuation of those assets. And when we looked at the valuation at this period, that has moved out. So the cap rate has pushed out to a higher number, which has led to the AUD 28 million impact to this first half.
I guess if the question, Simon, is to what extent is that then still at risk in terms of on a look-for basis? I mean, clearly, we've started to get some leasing momentum that's nearing closer to completion. The metro's closer to opening. And if I was to take you on the rate cycle, then I think you could form a balance view as to how much of that is still at risk.
Oh, no. I'm more looking for further profits upon completion rather than remaining risky profits you've already booked, Simon. Yeah. Can you make some comments on that?
Yeah. Look, I think to Simon's point, I mean, to be able to get the right outcome at the completion in FY 2025, it's we've got to progress leasing. And at the time of completion, the value will be looking at the underlying cap rates at that point.
So they are going to be the key factors which will determine the final outcome for the Vic Cross development.
And I think the key there will be well, there's a number of key inputs. But as obviously on the leasing, you're getting some leasing momentum as it nears completion. As we know, the North Sydney market is a market that moves late.
Yep. Fair enough. Hey, just my next question, final question. Hey, commencements, it looks like development commencements was about AUD 800 million in the first half. And in the slide deck, you're targeting another AUD 2 billion to commence in the second half, giving you a total of AUD 2.8 billion. Back at the full-year result, you had been targeting more than AUD 4 billion of commencements in developments. Can you just run us through the delta? What one or two projects have you shifted out of your commencement bucket for FY 2024?
I think the first thing we're doing is just being very balanced on what we start. And what we need to do is see the appropriate level of de-risking before we're putting things into production. I think during the period, you can see we announced the Daiwa House deal in London, which was an important JV to start the final residential plot at Elephant Park. What we've done is based on what we can see from an outlook perspective, we feel we've just got to be more prudent before we start or commence. So we have lowered that target down to that AUD 2 billion number for the year.
But what project have you decided to exercise discipline on and say, "Now, it's not the right time"?
I think it comes down to there will just be different things which will tie either into the FY 2024 or 2025.
So it really just depends on momentum of either sales or leasing. I just don't have that exact thing on hand, Simon, so I can come back to you in terms of what projects we've pushed out.
Not a problem. That's all I've got this morning. Thank you, Tony. Thank you, Simon.
Thanks, Simon.
Your next question comes from James Druce with CLSA. Please go ahead.
Yeah. Good morning. So I just wanted to be clear on the transactions that you're assuming for the second half and also be a bit more specific on some of the things that you're not assuming that provide a bit more upside to the guidance.
So I think in the outlook statement, we've gone through the key things that we anticipate. So we're including the development profits from the communities business, which is between AUD 130 million-AUD 160 million.
There's profits from the first Residences One at Barangaroo. I think previously, based on the JV accounting, we announced that half of those profits had been recognised. It was about half of those profits to be booked. So that's some circa AUD 150 million of EBITDA, which would just be above AUD 100 million post-tax. We've announced that there's a benefit of the cost savings initiative. So there should be a fly-through of some AUD 60 million there in total. And then we've flagged that there will also be in the development, the Elephant Park settlements that will come through from Milan that completes there. And then on the exact transactions, as we've stated in our note, there's a number of transactions which remain ongoing, and they will be dependent on timing. And some of those may occur and complete before 2024, and others may push out into 2025.
Okay.
And then the cash coming in for the second half, the Barangaroo settlements, that's net of places, I assume?
That is correct. So we've called out the two key contractual amounts of capital or cash flow that will inflow. And we've called so the settlements are commencing at R1. And so we PC'd and completed that tableau last week. And so the settlements can start. And that's some AUD 900 million. And then we've called out the communities transactions, which we anticipate to close, and there's some AUD 600 million. So that's the AUD 1.5 billion on cash input.
Yeah. All right. One more, if I may. Just the Strategy Day that you're planning in May. So it's clear there's no change there to your current strategy. It's just an update of how you're seeing things.
Yeah. I think what we have traditionally done each year, I normally do a strategy update.
This one, I'm just doing in May. We continue to always look at the market outlook. We have reconfirmed that we are focused on becoming that investment-led organization. The key to the strategy day is how do we continue to accelerate that strategy?
All right. Thank you.
Your next question comes from Tom Bodor with UBS. Please go ahead.
Good morning, Tony and Simon. I just was interested if I look in the segment note, you've got other expenses of around AUD 200 million, corporate overhead of around AUD 78 million, so all up about AUD 280 million. The profit, obviously, depressed in this period at AUD 60 million. But even on a full-year basis, below target, how far are you through the cost-cutting exercise are you? Do you think you need to take more cost out relative to the profitability of the business?
So on the AUD 150 million that we announced in July last year, we're 90% through that. You can see our headcount has reduced from over 7,600 to under somewhere in that 6,950-ish range. So we've done a significant amount of the overhead reductions. What you saw was a redundancy in the statutory level of AUD 56 million that did flow through. So we'll start to see a run-rate benefit of those savings come through in the second half. And then we'll expect to see that AUD 150 million flow through a mixture of cost of sales and overhead for next year in FY 2025. In terms of your question, do we need to keep looking at cost? We always keep looking at our performance and our returns. And so that's something we'll continue to drive productivity in the cost line.
So where the business is at today, though, do you think you've done enough?
I think we've done a substantial amount. But as we work through our business plans, we continue to look at how do we drive efficiency and productivity across the group.
I think where the business is today in terms of where we're invested the portfolio, the very substantial capital that we need to manage as well. So it's about managing. Don't just look at the profits when sizing an organization, also look at the capital and what we're managing and try to execute on. I think we've gone pretty hard on that level. So I think to go much harder requires a view on portfolio or a view on systems or the way that we work.
Okay. And then just on the investments, ROIC, I mean, there were no particular one-off transactions this period.
But yield's increasing to 3.6%, but you're still well short of your target. How do you bridge how long's it going to take you to get to your 6%-9%, ROIC? I mean, you're 4.5% today. You're building offshore capability, but presume that's not going to be a fast process. Is it something you think the 3.6%? I think the 3.6% two or 3 years.
Sorry to cut across, Tony. The 3.6%, I think you're referring to the co-invest yield, which is effectively distribution cash yield. If we sort of step that up and look at the segment yield, obviously, getting the benefit from the funds and the assets that we manage, that was a 4.5% for the half. I think we've called out that that has been impacted by a couple of things. Firstly, the lack of transactional profits.
So these are, for example, the sell-down of the asset management income fee stream and the U.S. military housing. Secondly, acquisition and disposal fees that would normally be sort of more captured at fund level. The third is building out those sort of platforms that we're building out in the Americas and Europe on the investment side to try and execute on our strategy. So if we look at the established platforms in Australia and Asia, the return on invested capital is more like about 6% absent both kind of one-offs and the performance fees, acquisition fees, etc. So that's sort of at the bottom end of the 6%-9% range. And one can expect that to move up when we start generating sort of some returns on acquisitions and disposals and so forth and so forth as we get a bit more churn through those portfolios.
In the Americas and Europe, well, they're going to continue to be sort of dilutive from an overall, ROIC, perspective until they hit scale. So our challenge is to get them to scale as quickly as possible and at the same time manage the costs on the way up in a very disciplined fashion.
Australia and Asia have been operating for decades. So is it going to take decades to get the U.S. and U.K. up to where it needs to be?
No.
I mean, they've been hitting their levels for decades too. So I think it depends a bit on the strategy that one's pursuing, which is then linked to the fee stream from capital.
But there are ways to deploy capital pretty quickly to generate fees quickly, which would then support a decent gross profit margin in those business. And then you just need to manage the overhead on the way through to make sure that's very disciplined. So I think there is a pathway to do that in a reasonable amount of time. And that's perhaps something that we're continuing to refine and look at. And we can come back to you in May on.
Okay. Thanks.
Your next question comes from David Pobucky with Macquarie Group. Please go ahead.
Good morning, Tony, Simon, and team. Thanks for taking my questions. Just looking at the segment notes and splits across the geographies, I just wanted to ask about Europe being down AUD 58 million versus down AUD 9 million in the PCP.
If you could please just provide a bit more color there and then perhaps more broadly, just thinking around your exposure to Europe on a go-forward basis, please.
I mean, as I first go, I mean, it's looking sort of half-on-half. In a business like ours, you can sometimes sort of see some reasonably significant shifts. But certainly, if we've run across the various segments in the first half, in the U.K., on construction, they're rebuilding their book, but they were in kind of revenue run-off mode effectively still. So margins were under some pressure. In addition, there was a negative hit from a $17 million provision in relation to a project which completed in a prior year that we completed in Leeds back in 2007.
15 years ago.
2007. $17 million. So that was kind of one of the key drivers there.
On Developments, again, sort of low levels of development and activity and still a relatively sort of nascent sort of investment platform that's building out. The other one-off to think about would be some development revaluation, downward revaluations within the Development segment, which we've called out in the okay. So relatively small numbers, but we can pull those numbers out perhaps a bit later on when we do the one-on-ones.
Okay. Thank you. And just the second one on the construction exit of the West Coast and central operations in the Americas, have those businesses been wound up more specifically? And what impact did those businesses have on the segment's margins or earnings overall?
So we are winding those two operations up. So we made some of those decisions, and some of those people have left the organization.
But there are some ongoing projects that we're managing through, which that tableau book will probably run through for another 12-18 months.
All right. Thanks, guys. Appreciate it.
Your next question comes from Richard Jones with JP Morgan. Please go ahead.
Thank you. Just wondering if you can tell us where the invested capital in the second half of development might get to. And would you expect to meet the development return hurdle this year?
So the development capital will come down because we've called out that we have hit our peak capital. You can assume that the AUD 1.5 billion that we've called out for both R1, as that capital comes back, and the community's first half, we get that settlement that comes through. We're also calling out for next year, AUD 1.1 billion of capital that completes with R2 and the final settlement of the community.
You can see we have now passed the peak in terms of our capital. The ROIC of that business will depend on different transaction timings, but most likely will be under our target ROIC ranges.
Although it's very much a through-the-cycle target, the 10%-13%. We've also previously called out some other sort of capital recycling initiatives within that segment that we've been working through. So again, which is why we feel it's appropriate to say that we've sort of reached peak deployment in terms of development capital in this half. And one can expect that to move downwards. Bearing in mind, we do have a longer-term target of having 40% of our capital in developments and 60% in investments.
The ROIC and the division hasn't been hit for, what will now be, five years. Is it a realistic target?
When do you think you might have the division delivering the 10%-13% return?
It is a three-cycle target. So again, what I called out at the start, we do need functioning capital markets for the business to be able to achieve that because we do rely on capital transactions each year. And it does require the market to be functional to de-risk some of the investments we've made. Now, in terms of the performance of that segment, it has been impacted from COVID and different delays and timing of projects. So it's a three-cycle target we've aimed to achieve. And it's something we're working on as a management team to get it back to the right returns. And we've taken a more disciplined approach on the portfolio.
Some of the decisions we're making to realize value from our land and exit the communities; all those decisions are going to help simplify that segment and help improve. Just finally, we also do need to call out the JV accounting structures that we previously had, which when I became CEO, we removed that JV structures, which led to a depressed return out of that segment. And I do have a slide in the appendix this year that calls it out on 17. The ROE has been depressed by some 1.4% in the current year and will be depressed again next year by some 2.4%. So those changes we've made to our structures have impacted the short- to medium-term. But in the future, we're setting the business up for longer-term success.
Okay. Just one more question, sorry, Tony. Can you just discuss your U.S. operations in entirety?
Obviously, after losing Google, it's a huge loss for that business. Is the business sustainable? And do you think it's core to the long-term aspirations for Lendlease?
What I won't do is go into each part of the U.S. business. But what we have been doing is taking various action around where we want it to focus. So like everywhere in the world, we're focusing on creating an investment-led platform. So that's point one. In the Development segment, with the agreement to move on from the San Francisco Bay project, we are revising how we develop into the future. And so at Strategy Day, I'll update the market. On construction, we've taken various action to simplify the construction operations in the U.S. And we're looking to make sure that the business is better set up to deliver more consistent performance.
And so that's led to a number of strategic initiatives over the last 6-12 months to simplify it. But I will update the market in May on go forward strategy.
Okay. Thanks, Tony.
Your next question comes from Ben Brayshaw with Barrenjoey. Please go ahead.
Hi. Good morning. Thanks for the presentation. I was wondering, Tony, if you could just discuss what changed between mid-December when the community sale was announced and guidance was reiterated at the low end of 8%-10% and the new ROE guidance of circa 7%. It looks like there's around about $100 million of delta at the EBITDA level. So I was wondering if you could help us unpack that, please.
So just in terms of what we always do each month, we reforecast and we re-look at what transactions we think will occur.
So today's guidance, we have done a lot of work in probability weighting, the timing of various things. We have called out that capital markets have been at their weakest point since 2012. And Lendlease is a transactional business that needs capital markets to be functioning to be able to execute its strategy in any given year. So a lot of work has been done through the first phase of this new half as we look forward. So what we have called out is our expected ROE. We're targeting to be 7%. We've called out that there are a number of transactions which are currently on foot. I'm not going to go through every one of those transactions. And the timings of those transactions could either occur in 2024, which could cause some upside, or they may time into 2025.
So that's the key analysis and what's changed in the guidance.
I think the other thing, Ben, just to sort of bear in mind is there are a number of moving parts. So there's around the transactions. So what sort of falls into FY 2024 and what perhaps falls into FY 2025. And we've been very clear that we'll be preserving security holder value on the way through to make sure we get the best outcome in the medium to long term, not just the short term. But the other thing is around the timing of when capital comes back. So we've got a number of capital recycling initiatives we're working through. The timing of getting that capital back has a twofold impact. Firstly, it impacts our ability to redeploy that capital into new strategies. These new strategies are investment-led, typically generating a sort of a day-one yield.
So there's the negative impact of that. So as capital recycling is delayed, there's a negative impact on earnings. And the other impact on earnings can also be on the debt side. So if that capital is recycled and not initially deployed but used to pay down debt, then we've got the impact of having higher debt costs too running through.
Okay. So just my second question, Simon, I was wondering just on serviceability, could you just discuss the interest cover ratio and, I guess, how comfortable you are in relation to covenant compliance? I appreciate your comments on the call that the ratings were reaffirmed in January, but it looks a little tight at 2.2 times. Just your comments on that, please.
Look, we've reached in terms of where debt is, we do expect to manage debt down.
Obviously, one was to look at interest cover, debt service cover, all the various sort of ratios. It's obviously a function of both earnings and sort of EBITDA, cash-backed earnings, and interest costs, which is obviously a function of where debt is at. We do expect debt to come down from this point. So that will alleviate pressure, create more headroom on our various ratios, covenants, and the like. And we also expect earnings to improve from this point. So I think calendar 2023 and the second half of 2023 was always going to be sort of a challenging time. But we've managed that well. We've managed that to the point where both rating agencies have reaffirmed our rating and held it.
Clearly, we are still working very hard to sort of make sure we get the capital back that we're talking about in terms of recycling and make sure that we do what we need to do to hit earnings. But I think clearly, on a look-forward basis, credit metrics are expected to improve substantially.
Are you able to clarify what the interest coverage covenant is?
It's not something we've ever given. It's not something which I'll be discussing on a call with equity analysts. It's more one for our sort of debt bondh olders.
Correct.
Okay. But is it above 2x?
Again, it's not a point for discussion. I'm not sure why you're going there. What I will say is we are comfortably in compliance with all of our covenants, comfortably. So there are no issues there.
Okay.
Your next question comes from Suraj Nebhani with Citi.
Please go ahead. Oh, good morning, guys. Thank you. A couple of questions have been answered. Just a quick one with respect to the with respect to the invested capital again. I just wanted to understand the movements into second half and maybe into FY 2025. They're just trying to understand whether there is any potential to get more or whether you need to get more capital back to meet the planned investments.
I'm unclear on your question, but if I'm typing this right, a couple of key things that we're focused on just in terms of capital is in development, and I just want to call it Development, we are aiming to get back AUD 1.5 billion of capital through the transactions and another AUD 1.1 billion. So it's AUD 2.6 billion with R1, R2, and the full receipts coming in from the communities business.
Once we get that capital back, the goal is to continue to reposition, to have more capital in investments through. That's the strategy to become investment-led. So what we are aiming to do is grow that investment capital over time and reduce that development capital. That's the plan through the strategy over the next few years.
Thank you. And just one more on the broader office markets. Obviously, there's a fair bit of office exposure in the pipeline. I know you called out some weakness on Stratford Cross in the valuation. But are you at all concerned on the valuations, I guess? Or have you called out a cap rate number on the assets under development?
No, well, you don't call out cap rate numbers. But if you look at the investment book across our investment portfolio, there was revaluation downwards that occurred in this last six months.
So the key for us is we are continuing to very much focus on executing and leasing the products that we've got on the way. And there's a lot of momentum that's occurred, which I called out across Vic Cross and across a number of our Melbourne developments. So that's the focus of the organization.
Okay. Thank you.
Can I just go back? Sorry, just been reminded that maybe I didn't give the most I could have added to my response earlier to Ben Brayshaw. And I was trying to work out where you were getting your numbers from, Ben, because they're not numbers I'm familiar with. But I think our team's just sort of back solved that. And you're pulling those numbers just from the half.
Just as a reminder that sort of covenants as they pertain to debt holders and ratings as they pertain to rating agencies are done on a minimum four-year basis. That can be a calendar year or a full financial year. They're not done on a half-year basis. They will often then have the ability to look through as well and take a longer-term view. So there's no point in trying to kind of back solve any cover ratios for the half and question whether that is causing a problem with agencies or holders because it's not the way that they look at it. The other question I'll come back on is perhaps with Simon Chan where the team has just quickly passed me a short note just in terms of second-half commencements being moved out.
I think the key ones are Southbank, which is about AUD 0.4 billion, MIND, immediately about AUD 0.3 billion, and Silvertown, about AUD 0.5 billion, again, which goes to the disciplined approach we have to capital and in some cases to sort of delays also that have been caused on some projects.
The next question comes from Alex Prineas with Morningstar. Please go ahead.
Thank you. Just on the U.K. remediation, I think it was a year ago you made a provision for around AUD 200 million, and that was a sort of gross provision that sort of assumed no recoveries from third-party contractors. Now, I think you've added to the provision. Does that imply anything about that there's no expectation of material recoveries from third parties? Or yeah, am I reading too much into that?
We still do anticipate recoveries.
But just the way the accounting standards work is there's two things at the moment. Once we know there's a cost, we need to take that provision. We need to be virtually certain on booking any recoveries. So far, we are working on strategies to recover both from supply chain and insurers, but they are not factored into the provision. The current provision is just a gross provision at this point in time.
Yep. So that's thanks.
And it's relative. One could then view that as being relatively conservative in the sense that but not yet taking into account any step-ins from the supply chain or recoveries from insurers. Those discussions remain ongoing. I think if we look forward, the risk is probably still slightly to the upside that there may need to be revisions to that provision. It does contain still a number of estimates on one side.
We need to be effectively virtually certain before we can start booking those recoveries.
Okay. All right. Thanks for that. That's it from me.
Thank you. There are no further questions at this time. I'll now hand back for closing remarks.
Thank you for joining. That's a wrap. I will speak to everyone in May on our strategy update.