Lendlease hit by $200m provision in Britain

The development major’s shares were routed as it also warned that it would miss targets in its Australian land unit due to the tougher market and bad weather.

Builder and developer Lendlease has turned in a $141m interim loss after being hit by a $200m provision, due to retrospective action by British government action over residential building standards.

The company insisted it was on track to develop $8bn worth of projects annually, but the surprise hit could increase pressure on the operation, which also called out slow Australian housing sales.

Lendlease shares dropped 6.1 per cent to $7.79 on Monday with investors warning that the jump in gearing to 16.8 per cent was a major issue, with investors worried about the balance sheet when the outlook is weak.

Lendlease is betting that it will see returns from big ticket projects including its $3.1bn luxury apartment and hotel complex, One Circular Quay in Sydney where it has sold 42 per cent of the 158 units, and it is also kicking off projects in the US, while planning new precincts in Britain.

The group generated a core operating profit after tax of $105m, compared with $28m at the same time last year. Its earnings per security was 15.2c, and it paid an interim distribution of 4.9c a security.

The British provision mainly relates to the Crosby portfolio it acquired in 2005 and the cash funding spread across at least five years, with the company saying it will stick to its profit targets.

Lendlease was swept up in industry-wide action by the British government relating to residential buildings. The move has retrospective effect by extending the period for defects liability from six years to 30 years and the company warned that sovereign risk was now higher in that market.

The company has held talks with the British government, which is requiring Lendlease to commit to remediate affected residential buildings or face significant trading restrictions.

The liability primarily relates to buildings developed by Crosby entities, acquired by Lendlease in 2005.

Lendlease is developing and managing Blue & William in North Sydney.

The company’s funds under management lifted by 8 per cent to $48bn and as it picked up big assets like a $1.4bn London office tower with the backing of an Australian and a Japanese partner.

“Notwithstanding the impact of the UK Government’s retrospective industry-wide action on our statutory result, we achieved solid progress against our key operating metrics after successfully resetting the business,” Lendlease chief executive Tony Lombardo said.

The company said that while lot sales of 766 in the Australian land business were subdued, reflecting current high interest rates, strong margins were still being achieved. Settlements of 1,022 for the half were up on the prior corresponding period, but the company warned that they were “anticipated to be below the full year target of 3,000 to 4,000 lots due to weather and associated production delays”.

Lendlease said core operating earnings were expected to improve in the second half of the financial year, however, current market risks, including inflation and interest rates, continue to “temper” the pace of recovery.

The company warned last November that return and margin outcomes for the three operating segments were likely to be towards the lower end of the expected fiscal 2023 ranges. Investments and development will generate 6-7.5 per cent and 4-6 per cent respectively, and there is an earnings margin range for construction of 1.5-2.5 per cent.

Lendlease is still banking on a switch to funds management to help smooth out earnings. “Accelerating our transition to being an investments led company is a priority. The high quality and sustainable product from our development pipeline will be a key driver of our funds growth to more than $70bn by fiscal 2026. Delivering our development pipeline safely, sustainably and profitably at a rate of more than $8bn of completed product per annum is equally a focus,” Mr Lombardo said.

UBS analyst Tom Bodor noted the company reiterated its fiscal 2024 targets though forward risks were highlighted while historical risks were also evident. He said the higher gearing signals ramping up production with a further $6bn of projects expected to kick off in this half.

Citi analyst Suraj Nebhani said the result was 5 per cent below consensus driven by weaker development earnings, which was offset by higher than expected asset sale profits in investments.

Mr Nebhani said that the fiscal 2023 segment outlook, as well as Lendlease’s fiscal 2024 targets were retained. “However, market conditions are challenging especially with potential recessionary impacts in the UK and North America, along with an overhang of higher interest rates. We therefore expect investor confidence to be lower than usual, particularly in fiscal 2024 targets,” he said.