Stockland to part with $420m for Lendlease buy: analysts

Stockland’s debt levels would increase by almost 2 per cent if it buys the $1bn Lendlease Communities business.

Stockland’s debt levels would increase by almost 2 per cent if it acquires the $1bn Lendlease Communities business, for which it will likely need to outlay $420m of cash, say analysts.

It comes amid speculation that Stockland is the only buyer left lining up for the Lendlease Communities business that has book value of about $1.05bn and Stockland, which is the country’s largest residential developer, would likely buy the business with its joint venture partner Mitsubishi.

Analysts at Morgan Stanley say in their research that if Stockland were to buy the whole business, its debt level could increase to 23.8 per cent from 21.9 per cent.

The analysts estimate it would create funds from operations accretion of 1.7 per cent for Stockland in the 2025 financial year, assuming 3000 lot settlements and a modest 12 per cent earnings before interest, tax, depreciation and amortisation margin, in line with Lendlease’s 2021 to 2023 average.

If Stockland could lift the Lendlease Communities margin to about 25 per cent, in line with its own business, the 2025 financial year accretion could conceivably be 7.8 per cent pre management fees.

Lendlease communities achieved an EBITDA margin of about 12 per cent in the 2021 to 2023 financial year.

Stockland, on the other hand, reported 28 per cent for the 2022 financial year, 30 per cent for 2023 and the analysts are forecasting 25 per cent for the 2025 financial year.

“Communities is Stockland’s core business, and we believe it could perhaps lift margins should it run Lendlease’s business,” the analysts said.

“If we assume Stockland buys Lendlease Communities using the $1.05bn book value through its 50/50 JV with Mitsubishi (based on its indication that if it were to purchase any major communities sites it would probably be considered by this partnership), and the vehicle is geared to a modest 20 per cent, Stockland would need to contribute $440m cash for its stake.”

This would take Stockland’s gearing to 23.9 per cent.

But if it were to achieve 3000 settlements per year, at $350,000 a lot at a 12 per cent margin and 6 per cent marginal cost of debt, FFO accretion to the 2025 financial year could be 1.7 per cent with upside if Stockland could extract wider margins, and management fees from Mitsubishi.

Lendlease communities targets 3000 to 4000 lot settlements per year, although the business has averaged just 2047 lots over the past five years.

In the 2024 financial year, Lendlease has flagged that total lot settlements will once again come in below the 3000 to 4000 target.

It has annual sales averaging 1918 lots per annum in fiscal 2019 to 2023 and at present, 2583 lots are in the bank.

The key complexity around Lendlease’s Communities business is that it does not own the entire, 42000 lots in an outright manner.

“We estimate around 60 per cent of the lots accessed via land management agreements, whereby Lendlease only pays for the land as it draws down for development.”

The partnership may use a conservative 20 per cent of debt and 80 per cent equity, meaning the partnership would need to contribute $840m of cash, where each partner would inject $420,000.

Debt at 6 per cent would create an interest expense of $26m annually, assuming it would fund its $420m contribution via corporate debt.

Stockland would earn some management fees from Mitsubishi for running the developments.