Ladies and gentlemen, thank you for standing by, and welcome to Lendlease's 2023 Full 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, 14th August, 2023. 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, thank you for joining the Lendlease 2023 full 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. Firstly, I'll provide an update on our five-year turnaround strategy, followed by an overview of our FY 2023 results. Simon will then walk through the financials before handing back to me for the outlook. We'll open up for questions. Starting on slide four. We've just completed the second year of our five-year turnaround plan to transform Lendlease into a leaner, more focused, investment-led company. I'm pleased to say we're making good progress.
With AUD 1.3 billion of strategic divestments since FY 2022 already completed, and the potential for further capital partnering through processes underway, we're simplifying our business. Since our strategy was rolled out, FUM has grown by 22% to AUD 48 billion, with a strong pipeline of new products and mandates. Consistent with our investment-led strategy, we're prioritizing creating investment product from our existing development pipeline. We're adopting capital-efficient project structures that support a high, sustainable rate of production while reducing overall capital requirements of our development business. We've reviewed the risk profile for our construction business, particularly for residential work. We'll no longer build apartments for sale for third parties, given the longer tail risk. Separately, we'll no longer build external projects below AUD 150 million.
We've achieved more than AUD 170 million in cost savings from the reset phase of our strategy, and post-year end, we initiated a further 10% reduction of our global workforce. This difficult but necessary measure is expected to realize pre-tax savings in excess of AUD 150 million per annum in future years. It also delivers a leaner operating structure consistent with our investment-led strategy. Against the backdrop of multiple interest rate increases, inflationary pressures, particularly impacting the construction sector and challenging market conditions across our regions, Lendlease continues to execute on its strategy and I believe remains well positioned as we begin to emerge from a period of uncertainty. Moving to slide six. We've continued to build on our turnaround plan with good progress across our operating segments. Since launching our investments-led strategy, we've achieved double-digit compound growth in FUM.
In FY 2023, we delivered 9% net FUM growth. We created AUD 5.3 billion of new FUM products, including AUD 1.4 billion from our 21 Moorfields acquisition in London, which is 100% leased to Deutsche Bank on a 25-year term, and AUD 900 million from our Milano Santa Giulia mandate in Milan. We have AUD 6 billion of FUM product in delivery, and we have AUD 4 billion of committed third-party capital to invest in coming years. In development, commencements were AUD 7.7 billion for FY 2023, pushing Work in Progress to AUD 22.9 billion. This includes our first two build-to-rent projects in Australia, with partners QuadReal and Daiwa House, bringing our international capability in this sector to the local market. Development completions remained cyclically low at AUD 3.6 billion, while improving on prior year.
They've yet to fully recover from lengthy pandemic-related commencement and delivery delays. We saw strong sales momentum across our new development, One Circular Quay, which is more than 50% pre-sold by value, nearly AUD 1.3 billion in sales, and One Sydney Harbour, which is approximately 90% pre-sold or AUD 3.8 billion in sales across the three towers. In construction, our business performance was subdued in the face of supply chain difficulties, high inflation, and subcontractor collapse. As I mentioned earlier, we've taken steps to better manage long-tail risks within our workbook. We continue to be a leader in sustainability, with a further 18% reduction in our Scope 1 and 2 emissions, and we're approaching 75% of our FY 2025, AUD 250 million social value target. We also strive for best practice within health and safety against key metrics.
Tragically, a subcontractor died this year on a site not under our control. We remain resolute to further strengthen global safety measures, including with our subcontractors. While rightsizing the business, we continue to invest in and support our people. Pleasingly, despite difficult conditions, our global employee engagement score increased by 4 percentage points. Moving to our financial performance on slide seven. The group has delivered a resilient operating performance against a difficult market backdrop. The group recorded core operating profit after tax of AUD 257 million for the year, down 7%. Core operating earnings per security were AUD 0.373, with a return on equity of 3.8%. The distribution of AUD 0.16 per security is consistent with the prior year and represents a payout ratio of 43%.
Disappointingly, we recorded a statutory loss after tax of AUD 232 million, after taking a provision of AUD 295 million to address the industry-wide retrospective action by the U.K. government in relation to residential building remediation. The estimated provision has increased by AUD 95 million on the half due to additional information being obtained and market cost increases. The provision does not include anticipated recoveries from third parties. Also, contributing to the statutory loss is AUD 175 million downward revaluation of our property investments. This is broadly in line with movements across our markets. Moving to slide eight. Our investment-led strategy remains on track. Our investment portfolio continues to grow, increasing 13%, with a 60% capital weighting target by FY 2026. Our Development segment has a pipeline of AUD 124 billion, including work in progress of AUD 23 billion.
We expect AUD 8 billion of completions in FY 2024, subject to market and operating conditions. In construction, we reported a strong top-line result, but a more subdued performance, given industry headwinds and provisions taken against prior projects. Moving now to slide nine. Investment segment, EBITDA of AUD 332 million, was down on the prior year, which benefited from a number of significant transactions. The investment segment generated a return on invested capital of 6.1%. Gains from the sale down to the military housing asset income stream were partially offset by a AUD 47 million provision for a receivable relating to the FY 2021 sale of the Americas Telecommunications business, which the provision reducing ROIC by 1.2 percentage points for FY 2023. FUM and AUM both gained 9% for the year.
Our investment portfolio delivered EBITDA of AUD 228 million, which included the further sale downs of the military housing. As a reference, performance was impacted by a AUD 74 million provision relating to the FY 2021 disposal of the Americas Telecommunication business. Looking at the underlying performance of the investment portfolio, which excludes the benefit of transaction gains and offsetting provisions, the investment distribution year was 3%, down from 4.7%. This was impacted by the deployment of capital into new products that are yet to fully yield, such as 21 Moorfields and Real Estate Investment Partners for our commercial value add fund. Rising interest costs also impacted returns for the year. Turning now to development on slide 10.
The segment delivered EBITDA of AUD 283 million, up 56%, and a return on invested capital of 3.3%. The result was led by the Australian region, benefiting from the management refresh and operational reset undertaken in FY 2022. Workplace assets, Sydney Place and Blue & William, were key completions alongside City Lights Point at Elephant Park in London, which delivered both build-to-rent and build-to-sell product. Key commencements include One Circular Quay, Sydney, Habitat in Los Angeles, a mixed-use build-to-rent and office project, and Hayes Point, an apartment for sale and boutique office project in San Francisco. Following completion of key substructure works, Hayes Point was recently paused, pending further de-risking through either tenancy commitments or capital partnership. We're accelerating delivery of our existing pipeline while focusing origination efforts on restocking Australia and select Asian cities.
Current development capital of AUD 6.1 billion represents 60% of the group's investments and development capital, which is expected to be reweighted towards 40%. We'll seek to balance commencements and completions through the cycle to target an annual WIP above AUD 20 billion. For FY 2024, we expect completions in excess of AUD 8 billion, underpinned by key projects such as One Sydney Harbour, Tower 1, and Exchange TRX, South Bank, and Elephant Park. Moving now to slide 11 on construction. The business delivered a subdued performance this year. Revenue of AUD 7.2 billion for the year grew 9%, led by Australia with 16% growth. New work secured was also supported by Australia and the Americas. The business continues to prioritize an appropriate risk-reward outcome over growth.
Looking ahead, our preferred work, workbook of AUD 9.9 billion provides confidence in future revenues, supported by a focus on government clients, including social, infrastructure, and defense, complemented by select work for corporate clients. We expect our earnings quality to improve in the longer term, given the changes we've made to the risk profile of the segment. I'll now hand over to Simon to talk through the financials.
Thanks, Tony, good morning, everyone. Turning now to our financial performance on slide 13. Core segment EBITDA of AUD 705 million was down 13%, impacted by lower investments and construction contributions, partially offset by improved development earnings. The Investment segment delivered EBITDA of AUD 332 million, down 33%, with a reduction from the sale of portfolio assets and associated earnings, together with a receivable provision of AUD 74 million relating to the sale of our Americas telecommunications business in FY 2021. The results include AUD 192 million of transaction gains from a further 34% sale of our Military Housing Asset Management income stream. Last year's result, as a reminder, included a AUD 167 million gain from the sale of 28% of these rights. Development EBITDA improved by 56%.
The Australian Communities business generated AUD 142 million of EBITDA. While there were some delays in obtaining authority approvals, settlements during the year increased by 52%. Rising interest rates impacted by sentiment, leading to a 43% decrease in sales. However, we did record an improvement in the final few months of the year. Our Asian business also contributed to the improved result, with The Exchange TRX retail asset in Kuala Lumpur recording a gain of AUD 60 million, with the asset now 87% leased. Asset nears completion. Construction EBITDA of AUD 90 million was impacted by industry headwinds and provisions relating to prior projects in the U.K. and Americas, amounting to AUD 53 million. The EBITDA margin was 1.2%, with these provisions reducing the margin by 0.8 percentage points.
Corporate costs were lower, down 11% to AUD 161 million, reflecting a leaner head office function. Net finance costs benefited from a AUD 63 million pre-tax gain on the partial buyback of our sterling-denominated bonds. Excluding the buyback, net finance costs would have been AUD 151 million, reflecting higher average net debt and higher average rates. Our tax expense was lower at AUD 59 million due to lower operating profits, and also a higher proportion of profits being derived from the trust. Core operating profit after tax of AUD 257 million was 7% lower. The group reported a statutory loss after tax of AUD 232 million, including a AUD 295 million provision in relation to U.K. building remediation.
Losses on property revaluations of AUD 175 million in the investment segment. A non-core loss of AUD 19 million, reflecting overhead costs associated with managing the retained elements of the Engineering and Services business. Moving now to net debt on slide 14. The increase in net debt from AUD 1.1 billion at FY 2022 to AUD 2.4 billion at year-end, includes AUD 2 billion of gross capital deployed across investments and development, comprising the co-investment spend under investments, One Circular Quay, One Sydney Harbour, and TRX, and other net expenditure. Investments capital recycling includes the partial sale of the military housing asset management income stream, the Craigieburn retail asset, and the sale of industrial assets. In the Development segment, there was a further AUD 0.6 billion of PLLACes transactions, bringing forward apartment settlement revenues for One Sydney Harbour.
The net outflows from construction, non-core interest tax and other, was AUD 0.5 billion. The group will continue to balance its capital and liquidity position to support growth while prioritizing balance sheet strength and flexibility. Turning over to slide 15. Invested capital for the year increased AUD 1 billion- AUD 9.1 billion, with AUD 0.3 billion of net capital deployed to support investments, and AUD 0.7 billion of net capital to fund development production. Other capital includes construction, which benefits from negative working capital and also non-core. Integral to our strategy is the is the proportionate reduction of development capital over time, while reweighting to investments.
To achieve this, we are pursuing a number of initiatives, such as employing more capital efficient project structures by bringing capital partners in early, exploring capital recycling opportunities within our portfolio, and reviewing the potential to monetize land entitlements, where the end use will not deliver FUM to our investments business. As we rebalance capital from development to investments, we will also seek to rebalance capital into Australia, with the current capital weighting of 31% being below our 40%-60% long-term target. Moving to slide 16. Liquidity of AUD 2.6 billion remains strong, comprised of AUD 900 million of cash and cash equivalents, and AUD 1.7 billion in available undrawn debt.
Our debt hedging strategy is well positioned, with average drawn debt maturity of four point four years and fixed debt at 64%, each decreasing due to the further utilization of floating rate facilities in the year and the partial buyback of long-dated sterling-denominated bonds as part of Treasury's capital management initiatives. In addition to strong capital and liquidity management, the group has a number of additional pools of capital available to it, providing balance sheet flexibility, including further strategic capital recycling and PLLACes instruments. Now moving to slide 17. Following the successful cost reduction program in FY 2022, the group has implemented a further cost-saving initiative to reduce its global workforce by approximately 10%.
The headcount reduction is expected to have minimal impact to the timing of project delivery and development completions, with a focus on the removal of management layers outside of projects and a reduction in offshore origination teams. Notably, the investment segment and growth in FUM are not expected to be impacted by the changes. A core operating profit benefit of approximately AUD 16 million pre-tax savings is expected in FY 2024, and AUD 150 million per annum when full run rate savings are achieved. Turning to slide 18. We will continue to use the portfolio management framework to support our ambition to become investments led, and will apply the PMF, the assessment of internal investment, and project decisions. The PMF targets, including segment ROICs, continue to reflect through the cycle targets rather than being guidance.
We will continue to focus on capital reallocation by regions and segments in line with PMF targets, and will reweight capital from offshore to onshore and from development to investments. I will now hand back to Tony.
Thanks, Simon. Turning to slide 20. We are on track to become an investments-led group. Our FY 2022 reset phase began to simplify the business with a new management structure to drive the integrated approach. We've already seen meaningful wins from this new structure, including 21 Moorfields, London, Comcentre, Singapore, and One Circular Quay, Sydney. Importantly, we've set the direction of accelerating development with a focus on FUM generating assets. This will be the primary driver of investments as we seek to grow FUM to AUD 70 billion by FY 2026. We are further simplifying the business with strategic capital partnering processes underway and more than AUD 150 million per annum of anticipated future cost savings. We've achieved strong FUM growth and have more than AUD 6 billion of future secured FUM in delivery, and more than AUD 4 billion of committed capital from our investment partners to deploy.
We have a framework for delivering appropriate risk-adjusted earnings in constructions as we move forward. We're in a solid financial position with balance sheet strength and flexibility to execute our plan while being prudent as we progress our strategies. Turning now to our final slide, the FY 2024 outlook. The group is guiding a return on equity at the lower end of our 8%-10% range. We've identified some of the key drivers of our operating segments for FY 2024. For Investments, we expect to see continued FUM growth in line with recent performance, having achieved 9% growth this year and 10% annually since the commencement of our strategy. We also expect to see our investment yield begin to improve as investment assets stabilize. We'll continue to explore capital partnering opportunities that are in the best interest of our security holders.
For Development, we anticipate more than AUD 8 billion in completion, including key urban projects such as Residences One of One Sydney Harbour, and a further recovery in community settlements. We're also exploring potential capital partnerships in FY 2024 and land sale opportunities within our urban development pipeline. In construction, we expect margins to improve. We also expect realization of backlog revenue to be in line with historical rates, supported by additional new work secured.
Our new cost savings initiatives are expected to deliver approximately AUD 60 million in pre-tax savings in FY 2024. 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.
Oh, hi, Tony and team. Thanks for your time. Just a couple on the result. I'm just wondering, as a focus on improving earnings quality, why you took the bond buyback above the line in the result? Because it would have been adjusted for tax, the result would have been 17% lower. Just trying to understand why you did that.
Well, Sholto, just on the bond buyback, it was just part of our capital management in terms of how we're financing the group. That buyback has been included through our financing, costs. It was taken through the above the line.
Yeah, if I can just add, Sholto, the, below the line is very much limited to property revaluations within the investment segment and so material non-operating items that couldn't have been reasonably foreseen. Buying back debt doesn't fit that definition. It is something that we'll do from time to time. Not all that common is something that we would expect to do as part of our active capital management. I'd go on to say that I think it was, the markets were very favorable, and we felt economically it was clearly the best thing to do for our security holders at the time.
Okay, just on the balance sheet, you know, the PLLACes was done just in the last week of June. So the gearing would have been circa 400 bps higher. Was that needed? Otherwise, you'd be closer to 20% gearing target. What was the rationale, given that's a pretty good project with minimum default risk, why, why were the PLLACes implemented before, just before year-end?
I think the, the delta is about 3%, not 5%, so we wouldn't, we wouldn't have been anywhere near the 20%. It wasn't needed at year-end. It was something which was actually in plan throughout the year, and it was just the, the fact that it, was executed, very close to year-end, was just really a matter of, the time needed to finalize documents, price, build the book, and execute. It's, there was nothing, that wasn't well planned, and in fact, that had been under discussion and in planning for a number, number of months. I would say that the bond buyback as well, to be very clear, had been under discussion and planning, for about six months prior to executing the transaction.
All right. Then just on the FY 2024, we'll move on to the forecast. You haven't given any targets for ROIC for development or construction margins, what, and investment, ROIC. What, what are they expected to be this year in 2024?
Just what we have now done is, Sholto, move back to guidance on our ROE. For the last couple of years, where we were not tracking to be in our ROE target, we provided more color and guided the market on our PMF segments and where we anticipate. I think what you should now look at going forward, those PMF targets, are the guides on how we manage the portfolio and manage the business. The key things I called out on that outlook, which should give the market confidence in how we're going to be performing, is firstly, we called out in development, which has been the key segment that's underperformed our targets. We feel we are back on track to deliver the AUD 8 billion plus in completion, so that's what the market should be expecting.
It should be expecting that the group will have a better settlement level in communities. We are looking at various partnership, joint venture, transactions that are well on the way. I think on construction, you know, we've flagged that this year, our margin was suppressed in construction and delivered 1.2%, and that was off the back of a couple of key things we took as provisions against prior projects in the U.K. and U.S. We believe the market should be looking at us getting back in our target range there of 2%-3%.
If you just take the development, that give more than doubling completion, so you should, I mean, you don't want to answer this, but you should be within your target range on ROIC, given you've paused Van Ness, cost out, would it be fair to say the development, ROIC should be in the range this year?
Well, I think what the market should now do is anticipate looking at our targets at that 8% to 10% to 13%, and we've built a plan predicated on getting back, within our target ranges that we've set ourselves in our PMF targets.
All right. Just finally, on the... There's a few activists on the register looking at white papers and proposing sell down all of communities and non-core businesses. How much engagement do you have with them, and were you willing to sell all of communities down or just bring in a JV partner still?
Look, most importantly, I talk to all our securities all the time, all our security holders all the time. I mean, it's important to get everyone's perspective. I've seen a couple of white papers come out. I mean, I think the papers that have come out actually align to the strategy we set out a couple of years ago. You know, that's quite pleasing to have that support by new security holders from my perspective. I think the key for us is we're very focused as a management team on executing the strategy, we'll continue to really focus on some of the things that we've called out, that we've got processes on the way, and aiming to execute over these coming 12 months.
All right, great. Thanks so much for your time, Tony. Appreciate it. Thank you.
Thanks, Sholto.
Your next question comes from Tom Bodor with UBS. Please go ahead.
Good morning, Tony and Simon. I just wanted to ask about Van Ness. Obviously, you're pausing it subject to sort of pre-commit. Just be keen to understand how much capital you've invested in that project to date and sort of what's the risk around an impairment if you can't de-risk it in the next couple of years?
Yeah, I think. Thanks, Tom. On Van Ness, which we've now the team's relabeled to Hayes Point, I think we have circa around about $260 million in capital in the ground on that project.
Is that, is that U.S. dollars or Australian dollars?
Aussie dollars. In terms of the pause, you know, what we want to make sure is we do de-risk it. From our, our, our perspective, two things: You know, we did-- I've called out, importantly, we'd love to be able to secure a tenant for the project in terms of the office component, or we'll make sure we've got a capital partner. Until we get one of those two things to come to fruition, we won't restart. From a capital perspective, we still see good returns in that project, so we don't feel at the moment there's any risk of impairment.
Okay, thanks. Then just around the communities piece. Firstly, you mentioned a partnering. It's an outright sale off the table. Second part to that question is: Do you anticipate, you know, a profit on that could be required to get you to the 8% ROE that you, you've guided to?
Tom, on the process, we've got a number of different options available to us. There have been offers for 100%, and there have been offers for a joint venture. What most importantly, we're factoring in is both management and board, is making sure we get the right economic outcome for our security holders that captures the best value for the organization. That's the priority that we're placing on how we're assessing the different things that are on foot. We are anticipating some profits to come out of the transaction we do do, and we're factoring that into our FY 2024 numbers.
Okay. Just to be clear, profit on sale for communities would help you get to the low end of the range, as in if that wasn't there, could be below?
Yeah, there are some profits that we're anticipating to come through on the transaction that we have on foot for FY 2024.
Okay, thanks. Just a final one. Just was interested in, just the level of overhead across the development platform globally and how that changes, you know, with communities, if you sell the whole piece over time.
I don't have the specific numbers on hand, but you know, what we've now done as an organization, we did announce the cost out program, which will deliver another AUD 150 million in savings for the organization. Half of that will come out of overhead, half of that is going to come out of our cost of sales. What we did last year is spend a bit of time on communities, getting the business self-contained, and running as a team, and I think offhand, we're probably spending circa AUD 30-odd million or the like, in terms of overhead, but we can come back with an exact answer for you there, Tom.
Okay, fantastic. Thanks very much.
Your next question comes from Ben Brayshaw with Barrenjoey. Please go ahead.
Yeah, hi. I was just wondering if you could just give an update on TRX Retail, and the AUD 60 million, taken, to EBITDA. If you could just clarify whether that is cash backed and just what the situation is there in terms of a pathway to realizing the cash profits, please.
Yeah. No, thanks, Ben. In terms of TRX, we're sitting today at over 90% leased and under final negotiation. We are getting the center, the retail component of that development ready for opening this financial year. The profits that were realized are based on the risk, reward, and the valuation uplift that comes with the progress on leasing that we made over the last 12 months. I think the leasing is up some 30%-odd plus over this last 12 months. At this point, it is in cash back. What we will be anticipating is using that asset to be the cornerstone of either a new fund or go into an existing fund structure that we have on foot.
Just in relation to Moorfields, could you just clarify: has the economic interest this last six months increased? It seems like it's, it's up to 50%. Just in relation to the carrying value, the carrying value is up up about 10%. Could you just discuss what, what has happened there over the last six months?
Yeah. On that transaction, we're only 25%, so we do have TCorp, one of our key investors, who owns 50%. We've got another key Asian investor who owns 25%. I think if there's a movement, it most likely relates to FX movements, Ben, but we can clarify that later with you, but that's where I think the shift was.
Sorry, I'm just referring to slide 16, where it says, "Current investment percentage is 50%." At, at the first half, it said, 25%.
Let me come back. I think that may be [audio distortion] No problems. We can discuss offline. Thanks, Tony.
Your next question comes from Simon Chan with Morgan Stanley. Please go ahead.
Hi, good morning, Tony. Good morning, Simon. My first question, I just want to circle back to Tom Bodor's earlier question, to make sure I didn't mishear your answer, Tony. On the community sale, are you-- did you say that you have factored in a gain on sale of that business in your 8%-10% ROE guidance for FY 2024?
Simon, that is what I said. We're assuming that we will deliver some profit from that transaction, and we've factored that into the 8%-10% ROE.
I assume you're not going to tell me the quantum of, what you factored in, are you?
No, I'm not, because we've got commercial transactions on foot. It really depends on where we land.
Can you confirm for me the book value of that communities business at present then?
I think the book value is circular, AUD 1 billion, today.
Excellent. I was just wondering if either of you guys could just give some, I, I guess, general color on capital partnering, and what appetite is like at the moment. I mean, obviously, you guys have hit the pause button on at Hayes Point. You mentioned, you know, potentially something could happen at TRX. Just what, what's appetite at the moment? Are people still a bit apprehensive about, you know, buying development projects, buying station development projects, et cetera?
Yeah, look, I think, pleasingly, over the last 12 months, we did launch some AUD 7.7 billion of commencements, and most of the things that we have launched, with the exception of Hayes Point, actually had the backing of capital partners. In the last six months, we've launched our first build-to-rent projects in Australia, one with Daiwa House, one with Quadreal. You know, there's still appetite in the segments around build-to-rent. When it comes to the One Circular Quay deal that we did, we brought Mitsubishi in for 67% and 1/3 was on lease. You know, there's definitely appetite for the right developments, that show the right risk profile and are in the right asset classes.
More broadly, I think, you know, when I'm talking to investors, there's a couple of things. They're very much focused on waiting for inflation to start to become back, you know, getting close to our normal ranges in, in our core markets, and we're starting to see inflation come back into that right target range. I think, interest rates, again, people were wanting some certainty on where interest rates were getting to from a perspective before they're ready to pull the trigger. Those two factors ultimately determine costs in terms of production costs to build out product, but also, you know, the interest rates will ultimately provide a bit of a guide on longer term risk-free rates and cap rates. In terms of sectors, still getting strong interest around value add. I think that's a, a key area.
I think build-to-rent continues to be in high demand. I think sustainable office product that shows the right product attributes is still there. I think what we are seeing is probably the next six months, there's a lot of capital sitting on the sidelines, and I think that capital is now looking to be a bit more active. I think as we're starting to peak in inflation and interest rates, I think that there's an appetite that's increasing going forward from this point.
Sounds good. Thanks, Tony. Cheers.
Thanks, Simon.
Your next question comes from James Druce with CLSA. Please go ahead.
Good morning, Tony. Good morning, Simon. First question, just around the cost out. Do you guys hit your ROE targets without that cost out here?
James, on FY 2024, on that guidance page, what we say to is, we anticipate to see about AUD 60 million of that benefit, come through in FY 2024. That's factored in, and that's pre-tax, and that's factored into our FY 2024 guidance.
Yeah, okay. You'd still be hitting, even without that, though, would you be hitting your ROE guidance, or not saying?
I'm not going to comment there, but what we have done is provide guidance that we will come into that eight-
I wouldn't go to that level of specificity, but certainly, the cost out exercise or the announcement was one that was a necessary announcement, really, a necessary measure to align the operations, certainly, in the offshore markets, and to reflect what we're doing around origination and the reduction in origination, in development, and not linked specifically to achieving a notional target in FY 2024.
Can you, can you talk to some of the big lumps of cash that are coming in this year? Obviously, there's, there's communities sitting out there, how, how much are you going to bring in from Barangaroo and anything else that you- we should be thinking about?
Yeah, I think the big one you should think through, which is going to occur in the second half, is, you know, Barangaroo, Tower One. Net cash flow will come in at about AUD 700 million from that, when you factor in that, we've already got places on that transaction, that's a big one. There's other initiatives that we've got on foot. I think the big one is people should realize this year we've got AUD 8 billion of completions coming through, some of those will be assets we'll either move into our investment segment that we're prioritizing to fund products or assets like I've called out, being Barangaroo, Tower One, the One Sydney Harbour, the build-to-sell asset.
Of course, we'll start to realize value, and we'll start to see more of that occur in future years as we're now getting back to a more steady level of completions, closer to our AUD 8 billion target moving forward.
James, perhaps I'll.
Can I just clarify?
Sorry. Go, James.
I just wanted to clarify whether that AUD 700 million was net of PLLACes?
Net of PLLACes.
Yeah. Net, net of PLLACes, second half.
Okay. Yeah, sorry, Simon.
I was just going to turn and say, in terms of, you know, how we're managing the cash flows and managing the business, we'll continue to manage within that 10%-20% net gearing range that we've clearly articulated to the market, and really sort of with full year, looking again, to try and sort of manage it within that sort of at or near the midpoint of that range.
Okay, you're expecting sort of flat, flat gearing?
Well, that's the, the full year position and obviously, given the nature of our business, things can go up and down intraperiod. We are looking to manage within the 10%-20% and sort of guiding towards the at or near the midpoint for the full year. You would have picked up, you know, in the script just so that in the presentation, just so that we're abundantly clear that we will sort of always sort of prioritize balance sheet strength over and above growth, you know, if that's the alternative that we're faced with.
Okay, one more, if I can, if I can be greedy. Just feel you've made a couple of comments around simplifying the business. I'm just curious, does that tend to bias you towards selling 100% of some of these assets which are in the market? How, how do you really... Can you really simplify the business through part sales?
Yeah, look, I think the number one thing, James, that we have been focused on when I took over and we did the first phase of the strategy reset, it focused in on group, and it focused in on Australia. We realized over AUD 170 million already to date on savings through that exercise. Over the last six to nine months, we turned our attention on the international operations on how to better run the business. What I've called out is from an overhead, so that's our enterprise service support level. We've streamlined the way we operate across that, so we've seen benefits coming across our enterprise support teams.
Also, when it comes to the way we operate, projects, and how we're focused on certain risk profiles in construction, we've decided to take a very different approach to some of the developments. Some developments will now look at being a master, developer of that development and realize value, not just from production, but also from land sale. Therefore, we have recalibrated the size of the teams that we've got working on a number of projects. As I've called out on risk profile on construction, we've taken a more disciplined approach in what type of work we'll win. 62% of our work's government-based today, with 38% private.
We've got a real aim and a bet on some of the external things that we do today to be more of that government lower risk, work from our perspective. Again, that's allowed us to rationalize some of the teams. Also offshore, you know, called out in Development. We're not looking to win any projects at the moment in Europe or the U.S., and so that's allowed us to again, recalibrate, resize teams. It doesn't rely on-
Thank you.
Thanks.
Your next question comes from David Pobucky with Macquarie Group. Please go ahead.
Good morning, Tony and Simon. Thanks for taking my questions. Just wanted to pick up on a, on a couple of the, the last few there. In terms of the cost savings, can you talk to the remainder to, to get to the AUD 150 million, realized in future years, from the 60 expected for 2024? I mean, how should we think about the, the phasing there?
So what you should anticipate, we've called out half of the savings will come through enterprise support, which that means about circa AUD 75 million, and that will flow through your, our overhead line. When it comes to the other half that are in cost of sales, some of those projects or people would have been capitalized as they would have been on development. What we are saying, some of that cost gets realized over time, and what we believe, you'll start to see that run rate benefit emerge through the FY 2025 year.
Thank you. That's clear. Just in terms of the balance sheet, you touched on it a little bit, in one of the last questions. Beyond FY 2024, I mean, it looks like you, you need to find just under AUD 2 billion of capital expenditure by 2026 to get to that AUD 12 billion of capital deployed, that target that you have. What's your view on the balance sheet capacity to get to that number, please?
Okay, I'd say a couple of things. We've got just over AUD 10 billion deployed today across investment and development. What we've clearly indicated through this presentation in and our announcement today is that we continue to pivot towards being investment-led, which means at the moment we've got 40% of our capital in investment and 60% in development. By FY 2026, we want that to be 60% in investment and 40% in development. In terms of how much capital will be deployed by the end of FY 2026, the AUD 12 billion that we talked about in prior periods, simply, it was never a commitment. That was always a target based on the ability to retain earnings, based on the ability to recycle assets above book, based on the ability to take on incremental debt.
I, I don't wanna guide the market towards that AUD 12 billion total at this year-end, because it was mistaken by some as being a commitment rather than a target. Clearly, we want to continue to grow capital deployed into investments and developments, but I'm more comfortable with just giving the overall sort of percentage allocation of 60/40 by FY 2022 by FY 2026. You know, clearly, we expect it to grow from its current levels over the next few years. I don't wanna put a hard target out there because I'm just conscious that it's going to be misinterpreted. To my earlier point, we will always sort of prioritize protecting the balance sheet over and above growth at any cost.
Thank you. That, that's very clear. Maybe just one last one, if I may, please? Just on interest impact, maybe one to Simon. Beat expectations, and, and thanks for some of the color there in terms of what drove that in FY 2023. How should we think about FY 2024? You know, should we expect any, any nuances there, in the coming year, please, that might, you know, drive a, a different outcome than expected?
We've pulled out in terms of the finance costs, we've pulled out the impact of the bond buyback, that's very clear in the presentation. As we kind of move forward, in FY 2024, clearly we are seeing rates remain elevated. We're still in a strong hedging position with over 60% fixed. We do expect to see our average debt, the cost of our average debt move modestly higher, as we look forward to the next 12 months. I'd also say in terms of average net debt, we've landed at year-end, at or near the midpoint, and I've sort of guided towards year-end as well. You can sort of read through that in terms of where you see average net debt for the year.
The cost of debt, clearly, there's a risk of a, a modest increase over and above where we are. We've finished the year at, you know, with an average net debt cost of 4.3%, so, you know, one could expect that to move up, as I said, modestly, with the, the floating rate debt that's in place.
Great. Thank you. Really appreciate it.
Your next question comes from Richard Jones with JP Morgan. Please go ahead.
Oh, hi, Tony and Simon. Just two quick ones. Just to clarify, TRX Retail, do you expect to sell down part or all of your 60% stake this year?
With TRX Retail, we will be aiming firstly just to get the center up and running and open, because that's key priority. We have now started to look at a capital strategy for that asset. We won't sell down 100%, 100% of our 60%. If we were trying to bring in a capital partner, we'll be trying to bring someone in for probably at least 30% of that stake.
Okay. We're not sure whether that will happen this year?
We're, we're planning to start working through that, to bring in that capital partner. This is something we've got on the go, and hopefully over the next sort of 12, 18 months, it's something the team will work on, as we look to stabilize the asset, get it realized at the right level, and then, look to bring in that right capital partner for the future.
Okay, thank you. Can you provide a leasing and kind of profit status of both Melbourne Quarter and Vic Cross office projects?
Yeah, I think, on Melbourne Quarter, to date, the key tenant we've got in there is Medibank. We are working on a number of key proposals. I mean, we have sold 100% of that asset down to a capital partner, so we don't have any capital risk. The key now is really on completion and to lease that up, and we've got some very good inquiries at the moment on that. On Vic Cross, you know, we're 75% of that asset. Again, we've still got 24 months to complete during this financial year, we'll keep the market up to date and abreast.
Sorry, just in terms of Melbourne Quarter, I think Medibank handed back some space. Is it, like, about 25% done? Is that right? Is there-- I assume there's a rent guarantee in place for 24 months or something, is there? Can you just clarify that?
Yeah, there is a rental guarantee that we had put in place, and yes, Medibank has looked to put back 25% of that space.
25%, okay.
It's 25% leased today, from our perspective.
Okay, thank you.
Your next question comes from Suraj Nebhani with Citi. Please go ahead.
Oh, thank you. A couple of questions have been, answered, but just one on the provisions that were taken in the investment division this period. Can you talk a bit more about that? That seemed to be a bit unexpected.
Perhaps I'll take this one. I think we're referring to the telco provision that was taken against Investment segment?
Yeah.
That relates to a business that was sold in FY 2021, our telco towers business. The sales proceeds at the time included a deferred element that was contingent on that business continuing to meet certain revenue hurdles along the way. Market conditions have sort of since deteriorated, and we're tracking slightly below the targets we need to hit to receive that consideration in full. We've taken the position at year-end to take a provision against part of that consideration receivable in line with the historic growth rates that we're seeing.
Just to clarify this, Simon, was the deferred profit already recognized in the earnings in FY 2021, and this is sort of this provision is?
No. I mean, the way that it was accounted for in FY 2021 was that that business had been carried at a market valuation. The disposal was sort of at or near that market valuation. There was no sort of large profit or loss on that transaction. I'll go on to say that, you know, it was entirely appropriate at that point in time to record this consideration as receivable. It was absolutely expected, based on revenue rates achieved to date and expectations going forward, and was also the subject of independent valuations and a commercial agreement. It is something which we've obviously been monitoring closely, but those quarterly growth rates have tracked down recently, so we've taken the decision to take an appropriate provision against that receivable.
I would add, there's another 18 months sort of left through to December 2024 in terms of the performance period. Again, we'll just need to keep that under observation to see how performance finishes up over the next 18 months.
Just, just one broader one on, on these provisions, right? I know that there are a few that have been flagged, these results, but, I guess, is it standard for any, I guess, sale in any business to have these provision, potential for these provisions down the line if there is a performance related, I guess, you know, something in, in the price? I'm just, just trying to get a better understanding of the likelihood of these in, in the future, given you are flagging, you know, sales of a few more businesses.
Look, every deal can be different, subject to commercial terms agreed. Obviously, as a seller, you prefer a clean bill and things up front, but that's subject to the commercial negotiations at the time. It's impossible to say, that that's standard or non-standard. It really is sort of a, transaction by transaction, discussion.
What I would say is, over the last, 24 months, we shifted in development, the way we've structured our joint ventures, which we now, you know, will realize profits over time, more akin to when risk, reward, and progress is made on leasing, or we've got that cash back. I think all I can say is the portfolio, from our perspective, we've been very focused on de-risking how we structure these deals to avoid, necessary provisions or the like into the future.
Yeah, look, and just to give a bit more color, I think, you know, if in doubt, we're certainly, always more keen to take the simple option rather than the complex.
Yeah, that, that makes sense. Thank you. Just want to follow up on Richard's question about Vic Cross. Can you just clarify for me, how much is that leased? I guess, what... Yeah, are there any sort of potential hurdles there near term? Like, you know, obviously, you recognize the profit there, but from the perspective of the, I guess, the buyer in that project, are there any particular guarantees or something like that, that, you know, any timelines for that?
I think on Vic Cross, just again, we haven't leased anything as yet. We have a number of prospective tenants that we are working to potentially be those first tenants. We still have another 24 months to run, Lendlease has a 75% equity interest in that. Just on, on Melbourne Quarter, just to clarify, again, that's been fully sold down. It's 25% leased today, and that's been 25% leased since FY 2021 when we kicked that development off.
Thank you. That's all I had. Thanks a lot.
Your next question comes from Alex Prineas with Morningstar. Please go ahead.
Thank you. Just following up on the questions about the telecommunications provision. You mentioned that there's 18 months to go to sort of measure that performance hurdle. Could that, does that mean that provision could get larger, or is that more sort of 18 months to go to, you know, perhaps make that back? Can you just indicate the potential ranges there?
Certainly. We've, we've effectively taken it down to the current run rate, so based on what we expect to receive. The residual amount is sort of circa AUD 60 million. That's really the kind of the amount at risk. If things were to outperform, then clearly there's the ability to potentially reverse some of that provision that we've already taken, some or all of it. That's your kind of, your range of, range of options. We also took a very modest provision against in the prior year of about AUD 20 million. You'd say that's your kind of, your range of outcomes. I think the, the position we've landed at is the conservative one, because it's based on the actual growth rates on revenue.
Again, we'll just need to keep that under review, and monitor that, and we'll update the market, at the next opportunity.
Thank you. That's it from me.
Thanks, Alex.
Your next question comes from Tom Bodor with UBS. Please go ahead.
Hi, hi, just a quick follow-up one, I think, on the development capital. You've flagged moving capital back towards Australia, sort of away from the U.S. and U.K. I'm just wondering, are there any implications for your AUD 8 billion per annum completion targets as a result of that, or do you think that's still valid?
No, look, I think, Tom, it's still valid. I think the goal is to really restock our pipeline here in Australia. What we're flagging is we'll look to not just put things in production, but where we feel we've added value to land, we will, from time to time, look at actually realizing some of the value of that land holding as well. They're all efforts and levers we've got to pull as we manage our development capital going forward.
Okay, thanks.
Thank you.
Your next question comes from Ben Brayshaw with Barrenjoey. Please go ahead.
Yeah, thanks for the follow-up question. I was just wondering if you could comment on if there is a capital partnering transaction for communities at a premium to book, will that likely be taken to core earnings as, as a profit on sale?
Yeah. again, thanks, Ben, for the question. What we will do is if there is, and what we have and put in our guidance final page, is in 2024, we are anticipating a transaction in communities, and we have factored that in to be part of our core profits in FY 2024.
Yeah, again, just think about the definition, sort of investment revaluations, the investment segment, and material one-off, non-operating items. Clearly, this is core to our business.
Great. Okay. Thank you.
Thanks, Ben.
There are no further questions at this time. I'll now hand back to Mr. Lombardo for closing remarks.
Well, thank you all, and thanks for joining today's call. We'll call that a wrap.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.