Lendlease, CPPIB in tower sell-off

Lendlease and the Canada Pension Plan Investment Board are looking to trim their stakes in the International Towers Sydney.

Sydney’s Barangaroo precinct. Picture: Monique Harmer.

Listed developer Lendlease and international heavyweight the Canada Pension Plan Investment Board are looking to trim their stakes in the $6 billion-plus International Towers Sydney at the city’s harbourside Barangaroo precinct in the year’s largest office property play.

Lendlease holds interests in the three towers worth more than $800m while the Canadian group has an investment now worth about $2bn in Tower Two and Tower Three, and is understood to be looking at selling about half this interest.

The Australian group’s move could release substantial capital, alleviating pressure on its balance sheet as it deals with writedowns on its engineering business and seeks to finalise a review likely to see it sell the troubled unit, with an update on a process being undertaken by investment bank Gresham Partners due at its half-year results this month.

Selling down would see Lendlease capitalise on the strong market for premium investment-grade office assets and help it avoid the prospect of an equity raising at its current discounted share price. Any transactions on the stakes in the Barangaroo towers would be likely to set new benchmarks for Australian office property.

Both parties could sell down at a premium, but details are closely held as Lendlease is preparing an off-market process that would see the interests first offered to existing investors in the wholesale trusts that own the towers.

Big institutions that have invested in the precinct include the Hong Kong Monetary Authority and Middle Eastern group Qatar Investment Authority. Local super funds and Lendlease’s APPF Commercial Fund may also seek to lift their interests. Once these avenues are exhausted, Lendlease could seek to tap fresh investors to come into the trusts.

The three high-rise premium-grade office buildings of International Towers Sydney dominate the area with about 280,000sq m of top office space atop a prize retail precinct.

They house local and international tenants including Westpac, KPMG, Gilbert & Tobin, Swiss Re, HSBC, Servcorp, Marsh & McLennan Companies and PwC.

The CPPIB unveiled its venture with Lendlease and its Australian Prime Property Fund Commercial to develop and hold the waterfront office towers at Barangaroo South in 2012. The venture committed $2bn with CPPIB committing half of the equity in what was its largest investment in a single real estate asset, making an eventual trimming of its holding likely.

The Lendlease International Towers Sydney Trust is now a $4.1bn entity. As well as Tower Two and Tower Three it also owns the smaller timber office, International House Sydney at Barangaroo South, and the Towns Place Car Park. Lendlease has a 15 per cent stake held on a 4.75 per cent capitalisation rate that had a book value of $515m at the end of June 2018. The trust also has the backing of Dutch group APG and local superannuation funds.

Tower Two is an 89,200sq m tower with 41 levels and Tower Three is 38 levels with 82,000sq m. The 7500sq m International House Sydney will house Accenture in its six levels of office space.

The $2.5bn Lendlease One International Towers, set up in 2015, owns the massive Tower One that spans 108,100sq m and has 48 office levels and three retail levels. Lendlease had a 7.5 per cent stake in One International Towers Sydney Trust, also held on a 4.75 per cent cap rate WITH a value of $292m. The trust also has backing from Lendlease’s APPF, the QIA and HKMA.

The listed company is likely to trim its holdings rather than to exit, in keeping with its desire to be aligned with investors. Broker JPMorgan estimated Lendlease could realise $550m from cutting back its interests while keeping about 3 per cent in order to retain the management rights of the trusts.

Lendlease and the Canadian group remain close and invest together offshore. They declined to comment.

JPMorgan analyst Ben Brayshaw is forecasting that Lendlease will sell down the coinvestments at Barangaroo International towers this financial year and predicts the company will complete its $500m buyback. He warned the first-half result could be weak and lack of cash flow was a key issue.

“At the result we would like to see Lendlease put greater transparency around the composition of its engineering and services backlog,” he said.