Lendlease says Australian housing challenging as it cuts US military exposure

The property group has warned that slowing housing transactions is posing a challenge for earnings as it offloads $126m US Military housing asset.

Global development giant Lendlease has warned of tough conditions for its local housing estates as it sold down more of exposure of its US military housing assets.

The company’s shares slipped in early afternoon trade as it said it had sold a further 21 per cent interest in its US military housing asset management income stream to an existing partner for a cash consideration of $126m.

The move followed the firm earlier selling off slices of the US military housing asset exposure, and it has now offloaded a total of 62 per cent of its interest.

Lendlease is under pressure from activist investors on its register to simplify its operations, with a wholesale fund run by the listed HMC Capital taking a near 3 per cent stake, with sharemarket investors Allan Gray and Tanarra Capital also holding stock.

The company is also selling a stake in local housing estates and is looking to exit its retirement property unit, with investors hoping for progress. Lendlease shares were off 5.5c to $7.88 in afternoon trade on Monday.

“This transaction demonstrates our ability to realise value from our portfolio to redeploy into higher growth opportunities, consistent with the execution of our strategy and ongoing capital management focus,” Lendlease chief executive Tony Lombardo said.

The sale is expected to contribute $75m to core operating profit after tax for fiscal 2023 and give the company an ongoing exposure to the US business.

Lendlease will keep 38 per cent of the asset management income stream as well as the development, property and construction management rights, in addition to a $200m equity interest in the portfolio.

As a result of the US military housing deal, the fiscal 2023 return on invested capital for the Investments segment is now expected to be towards the high end of the 6-7.5 per cent range. Lendlease had earlier guided towards the lower end of the range.

Lendlease called out challenging market conditions, including a slowing in transactions and delayed settlements across its Australian housing estate business, have impacted development earnings.

Lendlease has Macquarie Capital looking for a joint venture partner to take a 50 per cent interest in its $1.7bn-plus Australian housing estates business as it looks to release capital from the land subdivision unit.

The company said return on invested capital for its development segment was now expected to be in the range of 2.5-3.25 per cent, down from expectations of 4-6 per cent.

The expected fiscal 2023 earnings with interest, taxes, depreciation, and amortisation and margin for the construction segment was reaffirmed at the lower end of the previously indicated range of 1.5-2.5 per cent, as the business continues to remain disciplined amid inflationary headwinds.

Lendlease is backing a recovery and said it remained on track for its fiscal 2024 targets of $8bn of completions and a return on equity at the lower end of the 8-10 per cent range.

Macquarie analysts said the sell down of military housing provided a “one-off tailwind” to this year’s profits and was consistent with the company’s strategy to shift into higher growth opportunities.

But they said the downgrade to the fiscal 2023 development target “adds some risk” to the group’s medium-term development target of 10-13 per cent if challenging market conditions continue.