Lendlease falls to $232m loss as housing unit sale looms

The global developer and builder is struggling to turn around its operation in a tough climate for property companies.

Builder and developer Lendlease fell to a $232m loss as it was hit by higher writedowns on its British operations and confirmed it is advancing talks to sell all or part of its $1.7bn local housing estates unit.

The company will rely on profits from the sale of either the entire housing operation or a slice of it in order to hit its earnings return targets for this financial year.

It flagged that it would hit the lower end of its 8 to 12 per cent returns range, also aided by savings from a move to cut its global workforce by 10 per cent, which it unveiled last month.

The under-pressure company said it had also been in dialogue with activist investors, including HMC Capital and Tanarra, which had urged faster measures to turn around the company, in strategy papers.

Chief executive Tony Lombardo said the papers produced were “actually aligned to the strategy we set out a couple years ago”. He added that the focus was now on projects the company had underway, including a planned exit from retirement, although investors honed in on the $1.7bn housing unit, which is being chased by rival Stockland and offshore groups.

“We’ve got a number of different options available to us,” Mr Lombardo said. “We’re making sure we get the right economic outcome for our security holders that captures the best value for the organisation.”

Despite the job cuts, Mr Lombardo said the company was on track to deliver its target of $8bn of developments next financial year and flagged it would undertake more joint venture transactions.

Lendlease’s One Sydney Harbour project in Barangaroo.

He noted that construction margins were depressed as provisions were taken against offshore projects but said the company was targeting higher returns. The company has also paused a San Francisco project as it chases a tenant in that tough city market.

Mr Lombardo said there was appetite for build-to-rent projects and luxury apartments like Sydney’s One Circular Quay, as well as for sustainable offices.

Investors said that the composition of the company’s earnings was low quality and Lendlease shares fell by 3.4 per cent to $8.20.

UBS analyst Tom Bodor said underlying earnings before interest, taxes, depreciation, and amortisation came in 15 per cent below forecast. This was driven by provisions in construction and the exit from the US telco towers business.

Citi analyst Suraj Nebhani said investors may question the achievement of fiscal 2024 targets given an uncertain asset value and economic environment and rising debt costs.

The core operating profit was 9 per cent ahead of consensus but Citi said it was a lower quality driven by interest and tax, as operating EBITDA came in under consensus.

Lendlease blamed the headline loss on retrospective laws in Britain, tough trading conditions, and provisions against projects and receivables offshore, as well as lower property valuations.

Lendlease took a $295m provision due to industry-wide action by the British government on residential buildings. The provision increased by $95m in the half as the scale of the problem became clearer and due to market cost increases.

Property valuations in the investments area were also down $175m, reflecting an average drop of 7 per cent.

But it insisted that its strategy remained and funds under management have hit $48.3bn and there is about $22.9bn of work-in-progress. Development starts hit $7.7bn as the company aims to hit $8bn of work annually.

Mr Lombardo said the company had made “significant progress” during the year towards being an investments-led operation and simplifying.

Lendlease said core operating earnings per security of 37.3c was a return on equity of just 3.8 per cent but it expects this to rise next year. It kept the distributions per security at 16c flat on 2022.

Gearing was at 14.8 per cent and the company flagged that it would benefit from target development completions more than doubling in fiscal 2024, underpinned by projects including One Sydney Harbour at Barangaroo and a further recovery in its housing estates.

The company is shifting away from construction, where it now expects margins to improve, and said the global workforce cuts were expected to deliver a pre-tax benefit of about $60m to core operating profit this financial year.