Lendlease strategy day in focus as investors turn up heat

Tanarra Capital’s calls for Lendlease to split its international businesses have won backing from other investors.

Many large institutions are steering clear of Lendlease until chief executive Tony Lombardo can get the property developer back on track. Picture: John Feder

Embattled property developer and builder Lendlease is under pressure to radically revamp its strategy at its investor day next month as large dissident investors press for all options to be on the table to spark a turnaround.

The once blue chip company has fallen from grace amid a series of earnings disappointments with many large institutions steering clear until chief executive Tony Lombardo can get the developer back on track.

The group was rocked by John Wylie-led activist Tanarra Capital on Wednesday calling for it to demerge the bulk of its international businesses into a separate vehicle focused on capital realisation.

Lendlease has been working on its own plans to become a more capital light organisation by growing its funds empire but public pressure from dissident investors is bringing even more radical changes to the fore.

Tanarra’s plan would see Lendlease demerge the bulk of its international businesses but keep its Singapore business along with the local operations. This would be a highly investable proposition that has consistently generated more than 15 per cent returns on capital, it said.

The idea was presented in a letter to Lendlease’s board and would see the separate InternationalCo eventually sell off its $4bn development asset base in an orderly way.

Lendlease shares added 1.4 per cent to close at $6.34 on news of the plan.

Tanarra said the case for a demerger should be analysed at the forthcoming investor day – on the basis of “if not, why not?”.

“If the company does not go down this path, investors deserve to understand in detail why, given the impact the global growth strategy has had on securityholder returns,” the letter said.

Lendlease now intends to have 40-60 per cent of its capital base in Australia, which Tanarra said was a “two bob each way” strategy.

The developer has a series of high-profile projects in Britain and a large US operation. But Tanarra said it should stick to Australia.

“We believe there is plenty of growth runway available to Lendlease in its home market in the years ahead, through emerging and growing investment strategies such as build-to-rent, mixed use urban regeneration, affordable housing, and the simple need for more apartment stock to respond to a structurally growing population and a national housing supply crisis,” its letter said.

The call to consider radical options has the support of other shareholders. Allan Gray chief investment officer Simon Mawhinney said the move was “sensible and necessary”.

“It’s exactly what our analysis points to. Not doing this would be continuing to do the same thing as they’ve been doing over the past 10 years and hoping for a different outcome. Isn’t that the definition of insanity?” he said.

Another major shareholder, a HMC Capital-managed fund, has also urged Lendlease to sell off non-core assets but has not called for the company to be broken up.

Lendlease has been selling down assets and last December sold 12 Australian housing estate projects to Stockland and a Thai partner for $1.3bn. HMC said the sale was one of its key recommendations made in its own Lendlease turnaround plan last August.

“We will continue to proactively engage with Lendlease management and board, and we are confident they have embraced our additional strategic recommendations including exiting other non-core assets including retirement living, Ardor Gardens in China and Military Housing,” it said.

Lendlease has tried to sell them but has not taken offers, partly as they reflected perceptions that the company was in a distressed state and also as conditions are tough.

The company emphasised it was looking beyond the dissident calls for a quick turnaround.

“Like many listed companies, our register is composed of a broad range of securityholders with sometimes differing investment objectives,” Lendlease chief executive Tony Lombardo said.

“We’re working closely with our board on the company’s strategy. There’s more we need to do to get the right securityholder returns.”

Mr Lombardo said the company had simplified resulting in a sustained $320m reduction to its cost base. It has also scaled back new development projects to Australian cities and Singapore and shuttered parts of the US construction business.

Analysts endorsed Tanarra’s latest plan but said like HMC’s proposals last year, and the share price itself, attempts to change the stock “have come to nil”.

“I like the initiative, but the board appears to be the impediment to all this,” one analyst said. “Alignment appears to be non-existent. Tanarra and others have all said they are unwilling to listen or change.”

He said the company needed to sell off assets and businesses, with management changes potentially in prospect. “A change of CEO may be painful near term, but hopefully beneficial longer term. Still very doubtful they do this,” he said.