Lendlease faces new activist shareholder in HMC Capital

Property developer Lendlease is facing a new activist investor on its register, with a wholesale fund run by the listed HMC Capital taking a near 3 per cent stake.

Property developer Lendlease is facing a new activist investor on its register, with a wholesale fund run by the listed HMC Capital taking a near 3 per cent stake in the under-pressure company.

The global developer is being pushed to simplify its sprawling operations and exit businesses where it does not have an advantage over rivals, as investor concern about the souring commercial property environment rises.

Sharemarket investors Allan Gray and Tanarra Capital have also bought into the company as they believe its performance can be turned around as markets recover.

Lendlease has built up a $121bn pipeline of projects and has ambitions to dramatically boost its funds arm to $70bn but is suffering due to the harsh climate, particularly in key markets in the northern hemisphere.

Chief executive Tony Lombardo has laid out ambitious targets of launching $8bn worth of projects annually. The local division is completing the Barangaroo South precinct in Sydney and has launched the city’s One Circular Quay ­project.

HMC Capital, a funds manager that has grown out of the HomeCo operation that bought the former Masters portfolio, is having an disproportionate influence. Ex-UBS banker David Di Pilla is at the helm as it heads towards a $10bn property empire.

Last month, it bought a $1.2bn portfolio of Healthscope properties which it backed with one of the largest real estate investment trust raisings since the pandemic. A year earlier it made a tilt for AMP Capital’s real estate operation. HMC had flagged it was building up a stake in an undervalued real estate company, and the HMC Capital Partners Fund 1 disclosed in an update that had built up the Lendlease stake.

HMC Capital chief executive David Di Pilla

It said Lendlease’s performance had been disappointing in recent years, which was reflected in the security price fall of about 35 per cent in the 12 months to the end of March, and it is well off its mid-2018 peak of $21.60.

The manager said this was despite Lendlease’s high-quality project pipeline in Australia and globally, and its unique model focused on major urbanisation projects in gateway cities.

Lendlease is 21 months into a five-year turnaround plan and is attempting to accelerate its recovery. But HMC said even after accounting for some risks in the investment valuations, Lendlease’s share price reflected limited value for its $48bn funds empire and for unrealised development profits. By contrast, rival funds and development companies, like Goodman, trade at significant premiums.

HMC indicated that it was supporting the direction Lendlease was taking. “We agree with Lendlease’s broader strategy to accelerate the transition to a capital-light, investments-led business,” it said. But it wants changes.

“We believe a more simplified business, with fewer moving parts, will reduce risk and allow management to focus on the core business – that is, delivery of the development pipeline and creation of product for the Investments business,” HMC said.

And it wants Lendlease out of tougher areas, including its former mainstay of building, to help drive cost-cutting. “This could include reducing exposure to non-core segments such as communities and retirement, narrowing the scope of the low-margin construction business to focus on internal projects only and reviewing Lendlease’s presence in geographies where it may not have a competitive advantage,” HMC said.

Lendlease is already facing fresh salvos from another activist shareholder, the John Wylie-led Tanarra Capital, for not moving quickly enough to restore its fortunes. Tanarra has called for deep cost cuts and also argued for a lower exposure to housing estates, and exits from retirement villages and US military housing.

Contrarian investor Allan Gray is also backing Lendlease’s shift into investment activities and has boosted its position as it believes the market is overly negative about its longer-term prospects.

At a recent webinar hosted by Allan Gray, Mr Lombardo said that investment activities were where Lendlease made its highest margins. “The key for us as an organisation is to really grow that and get to global scale in that part of the business,” he said.

The company is cutting back its construction arm and has cut works to about $10bn of external work, targeting a margin of 2 to 3 per cent.