Lendlease slammed by Covid pandemic and soft development outlook

Global developer Lendlease has been hit hard by the pandemic but new CEO Tony Lombardo is sticking to a strategy of ramping up new projects and funds.

Lendlease chief executive Tony Lombardo: ‘Despite Covid impacts, profit recovered and the group made significant strategic progress.’ Picture: Rendy Aryanto

New Lendlease chief executive Tony Lombardo has received a baptism of fire, as the company’s shares plunged as he delivered his first annual results at the helm of the global builder and developer.

Lendlease shares fell by 7 per cent to $11.71 in afternoon trade on the back of concerns about the tough outlook for the development division and the disruptions caused by the pandemic.

Lendlease gave a downbeat assessment about the short-term prospects of its development unit but said returns should be back on track over the next two years, as it rolls out its pipeline of more than $114bn worth of projects.

Lendlease reported net profit of $377m, at the lower end of its flagged range of $375m-$410m. Investors marked the company down as it said it would not meet a targeted return on equity of 8-11 per cent until fiscal 2024, and would take a restructure charge of $130m-$170m and another $230m-$290m as it simplified its development business.

There is now a renewed focus on a review of the company expected to be released at the end of the month and the company insists it will step up to develop $8bn worth of projects annually.

“The recently announced changes to the organisational structure better position the group to accelerate development production, continue to deliver our construction backlog and grow our investments platform in a more focused and efficient way,” Mr Lombardo said.

“The review of the development portfolio reaffirmed the underlying strength of the $114bn development pipeline across targeted gateway cities. We are confident that production will accelerate to more than $8bn per annum by fiscal 2024.”

Mr Lombardo said the company expects fiscal 2022 to be the “cyclical low point” for both development production and profitability.

“We are targeting to deliver solid returns across the construction and investments segments, although activity levels are likely to continue to be affected by the pandemic,” he said.

Analysts said fiscal 2022 was guided to be the cyclical low in earnings and they expect downgrades given the weak development guidance.

JPMorgan’s Richard Jones said that Lendlease had a weak result and very soft fiscal 2022 outlook.

“It feels like the new CEO has taken a kitchen sink approach to fiscal 2022 … Lendlease’s asset classes and geographic mix are not conducive to a significant ramp up in activity in the short-term with the targeted recovery in fiscal 2024,” he said.

The largest project, a $21bn precinct for Google in San Francisco Bay Area, was deferred from the second half of this year to fiscal 2024.

Lendlease’s core operating profit after tax jumped by 83 per cent to $377m and earnings per share jumped 60 per cent to 54.8c but investors focused on the downbeat outlook.

Mr Lombardo said the pandemic had a significant impact across each of its markets and operating segments.

“Despite Covid impacts, profit recovered and the group made significant strategic progress,” he said.

Lendlease’s development was hit by production delays, with ongoing impacts on leasing and sales across its projects and it copped a $60m pre-tax provision on the build-to-rent project at Elephant Park in London.

But it won Japanese house Mitsubishi Estates as a backer on the first two residential towers at One Sydney Harbour. Projects such as these helped boost development returns to 7.2 per cent but Lendlease said this was still below target.

Building was constrained by delays in kicking off new projects, site shutdowns and lower productivity. Social distancing rules prompted a 16 per cent plunge in revenue compared with a 9 per cent fall in hours worked.

Lendlease used the crisis to add to its workbook and a total of $8.4bn was added to the development pipeline, including six urbanisation projects with an end value of $7.4bn, with a focus on Britain, the US, Tokyo, where it unveiled a major data centre, and Singapore.

Lendease said the enforced lockdowns from the Covid pandemic continue to have “significant ramifications” for real estate markets across the global gateway cities in which the group operates.

“While we are confident these cities will rebound strongly over the medium term, fiscal 2022 is expected to be a challenging year,” Mr Lombardo said.

Returns on development are expected to range from 2-5 per cent, well below the 10-13 per cent targeted, while construction is on track and investment is just under.

Originally published as Lendlease slammed by Covid pandemic and soft development outlook