Lendlease hunts for post crisis pick-up in global markets

Steve McCann leaves Lendlease aiming to convert about $20bn of its planned projects in major capitals into production by the end of fiscal 2023.

Lendlease CEO Steve McCann said profit was recovering from the worst of the COVID-19 impacts. John Feder/The Australian

Global developer and builder Lendlease says it is on track to hit its ambitious target of doubling its development production to more than $8bn worth of projects annually despite its first half earnings coming in under expectations.

The company was hit by the coronavirus crisis but is now aiming to convert about $20bn of its planned projects in major capitals into production by the end of fiscal 2023 as it bets that governments stimulating economies will support its new precincts.

The speed at which its large-scale urbanisation projects will kick off partly hinges on the recovery of markets including London, Milan, New York, LA and San Francisco, where it is betting that vaccine rollouts will drag people back into cities.

Lendlease’s first-half core operating profit fell by 26 per cent to $205m and it is also looking to capitalise on new opportunities that can be secured cheaply as it comes out of the crisis.

“Our core business is at a pivotal point, with a development pipeline of $110bn and a growing number of major urbanisation projects in our international gateway cities, across US and European cities in particular,” exiting chief executive Steve McCann said.

He is handing over to Asia boss Tony Lombardo at a time when Lendlease has $12.2bn of development work in progress. Mr McCann said converting the pipeline would support getting to the annual production target of more than $8bn.

The company is putting more emphasis on winning partners to get its projects underway more quickly and is looking to grow its $38bn in funds under management and lift returns following pandemic induced weakness.

“Our urbanisation pipeline is expected to create more than $50bn of institutional grade assets for our investment partners and the group’s investments platform. We expect to more than double our current $38bn in funds under management as this pipeline is delivered,” Mr McCann said.

He said that the pipeline had a strong residential element and in the local land subdivision market a recovery had been driven by low interest rates and attractive employment levels, although the company did not have sufficient product on sale during the initial market surge.

It will launch new land projects next financial year and is already in talks to secure an investment backer on the second luxury residential tower at Sydney’s Barangaroo precinct.

First-half profit fell 37 per cent to profit $196m and the company’s shares fell by 1.3 per cent to $11.73 on Monday.

Lendlease generated earnings per security of 29.8c and will pay an interim distribution of 15.02c per security, a payout ratio of 50 per cent.

The company completed the sale of its loss-making engineering unit to Acciona for $197m and services business is expected to be sold next. It also sold out of its US telecommunications and US energy businesses as it cleans up its complex business model.

Lendlease set up development joint ventures across three urbanisation projects representing $4bn in development value. Aware Super also took a 25 per cent stake in its retirement living business.

Mr McCann said profit was recovering from the worst of the COVID-19 impacts – albeit activity is still below pre-pandemic levels – and operating conditions were gathering momentum towards pre COVID-19 levels.

Core operating earnings before interest, taxes, depreciation, and amortisation was $405m, a significant lift from the second half of fiscal 2020, although lower than the $525m in the first half of last year.

UBS analysts said the result was an 11 per cent miss at the earnings level however there were low expectations heading into the result. They said development and investment management were “soft” and construction was “solid”.

They noted that Lendlease’s much vaunted pipeline was pushing out slightly but a huge project for Google in San Francisco was still expected to get underway in the next financial year.

Lendlease said the weaker market environment gave an opportunity to secure new urbanisation projects alongside investment partners on attractive terms.

Already in New York, it is turning a city block into a $1bn complex of apartments for rent and it also secured its first urbanisation project in Los Angeles, with an $800m end value.

JPMorgan said Lendlease was a “good business” but in the short term its asset classes and geographic mix were ”not conducive” to a significant ramp-up in activity which will see a more measured recovery to normalised earnings.

“COVID-19 uncertainty is likely to impact near-term conversions, with development production to be constrained over the next 18 months, however, Lendlease is expecting to convert more than $20bn of the development pipeline by the end of fiscal 2023. This suggests a slower recovery in the development earnings than the market may be expecting,” JPMorgan said.

The development unit was hit by COVID-19 and the company acknowledged that uncertainty was hitting tenant demand and investment appetite in offices.

Building rebounded from COVID-19 disruptions although revenue was constrained, with activity affected by ongoing impacts across sites and delays in starting new work. Fresh projects worth $4.9bn were secured as governments push social infrastructure.

The investments area came back from the worst of the COVID-19 impacts but was hit by reduced asset management fees, predominantly related to the retail sector, where the flagship local fund is selling down assets. Lower returns from the retirement business and shopping centres also weighed on earnings.

Lendlease said the weaker market environment gave an opportunity to secure new urbanisation projects on attractive terms.