Lendlease faces investor revolt as turnaround hopes fade on $136m loss

Investors have sold off property developer Lendlease as they were disappointed with the company’s outlook, which has pushed back plans to turnaround its operations.

Lendlease CEO Tony Lombardo at Barangaroo in Sydney, which was built by the company. Picture: John Feder

Major investors have been rattled by the failure of Lendlease’s turnaround strategy to kick into gear and drove the stock down by 14 per cent on Monday amid concerns about its ability to simplify its business and restore value.

The Tony Lombardo-led developer and builder insisted that it was on track despite slashing its earnings outlook and it called out the tough property environment as stopping it from moving faster.

But it is under pressure from activist investors on its register who are pressing for faster change as the once blue chip company tries to change from a risky builder into an investment and funds management operation.

Lendlease flagged it would again update investors on its strategy in May after it fell to an unexpected $136m interim loss, hit by property valuations and redundancy costs as it looks to cut down its sprawling empire.

But investors were disappointed by the surprisingly poor operating performance and the pushing back of deals that could see the company sell off troubled units.

It blamed the tough commercial property environment, particularly in the United States and Europe, where values have fallen and deals have dried up, making it harder for it to find buyers for large assets.

Investors told The Australian that the company’s credibility was in doubt after repeated downgrades and earnings misses, with some calling for the board to be more accountable, and management fended off questions about its compliance with debt covenants from investors.

Lendlease is already in the sights of activists including David Di Pilla’s HomeCo, which has a stake via a fund, and John Wylie’s Tanarra Capital. They separately bought into the company and have presented turnaround plans but Tanarra has rounded on the company due to its record of destroying shareholder value.

“Lendlease has a broken business model set in a different era of cheap money, which allowed poor capital allocation, big overheads and undisciplined global expansion. Incredibly; the shares of this once iconic company are less than what they were 30 years ago. It needs restructuring and change,” Mr Wylie said.

Investment house Allan Gray also flagged concerns. Allan Gray funds manager Simon Mawhuinney said: “I can’t think of a silver lining in today’s result. Shareholders have put over $6bn into Lendlease’s hat and for some reason the company can’t even manage to spit out a carrot.”

UBS analyst Tom Bodor said the interim result was a large miss to market consensus expectations and an 18 per cent earnings guidance downgrade against the market consensus, with the local development business also losing money.

However, analysts said the company’s complex international businesses and unattractive liabilities in its construction business were protecting it from being taken over as few suitors could obtain debt.

The tough first half was marked out by the $1.3bn sale of the bulk of its local housing estate operation to a Stockland venture and other sales, including a full exit from retirement, are in the pipeline.

Lendlease’s Figtree Hill project in southwest Sydney. Picture: Jonathan Ng

Lendlease cut its expected fiscal 2024 return on equity guidance to 7 per cent, warning about the lower certainty of deal timing and higher execution risks.

The company said it faced difficult real estate capital market conditions, with slower first half activity and lower property valuations. It generated a core operating profit after tax of $61m, down 42 per cent on last year’s first half result.

Lendlease pointed to better conditions in the second half, when core earnings are expected to lift, but warned that market volatility was making timing deals difficult. The company trimmed its operations by exiting construction on the West Coast and at its central operations in the United States.

Lendlease is expecting more consistency from the investments unit, a much better return from development and a higher contribution from construction, while it also reaping the benefits from deep cost-cutting.

Lendlease warned its financial performance in Europe and the US continues to be hit by challenged capital markets. But the Australian business is expected to produce a strong full year result, while Asia will be consistent,

But it is taking a hard line against calls to sell off more units into tough markets, or take deep discounts on individual assets, the company said it would “continue to prioritise securityholder value ahead of transaction timing”.

“Despite challenging capital markets, we’ve continued to execute on our stated strategic initiatives, simplifying the business and further streamlining our operations,” Mr Lombardo said.

The interim loss was slightly up on last year’s first half when the company lost $141m. The headline loss was driven by $125m in cuts to property values, redundancy costs of $56m, and the setting aside of another $22m for building remediation regulations in Britain.

The core operating earnings per security of 8.8c equated to a return on equity of just 1.9 per cent and the interim distributions per security of 6.5c was paid from operating income of the company’s property trust.

The company boosted its exposure to investments and developments, pouring $150m into the APPF Retail fund as it sold off assets and paid redemptions. These moves were offset by the sale of Darling Square retail in Sydney for $88m.

Development capital increased 18 per cent to $7.2bn but is expected to drop as big projects are finished. Lendlease insisted it was still on track to shift more into more passive investments, with a reweighting towards 60 per cent.

Lendlease’s gearing hit 22.9 per cent but is expected to fall as settlements from big ticket residential projects in Sydney are received, including from Residences One, One Sydney Harbour, which is 98 per cent sold.

The overall investments unit segment generated an annualised return on invested capital of 4.5 per cent, with existing platforms in Australia and Asia running even higher.

Funds under management were broadly stable despite challenging markets, down 1 per cent to $47.8bn, but the area was hit by $1.1bn of negative revaluations and asset sales.

The development unit slipped to a return on invested capital of 1.4 per cent, but earnings were up as it received a payment after plans to build more than $20bn worth of property with Google in the San Francisco Bay Area were dumped.

The area was hit as the company slashed the value of the under-construction Victoria Cross over station development in North Sydney, hitting earnings by $28m, although it locked in its first tenant, Ventia.

The operating performance for the housing estates was impacted by planning approval delays and settlements fell by 7 per cent to 952, but sales bumped up to 815.

Its building unit’s revenue dropped by 18 per cent to $3bn, with an underlying earnings margin of just 1.7 per cent as it was hit by a settlement on a project in Britain. The business won $2.6bn of new work led by a recovery in European activity, with the US and Australia also active.