Lend Lease released their annual results today revealing a dramatic -80% reduction in operating earnings before tax with the second half significantly impacted by COVID19.
Group Chief Executive Officer and Managing Director, Steve McCann, said Lendlease experienced a disappointing financial result in FY20 as the Group brought to account costs for the exit of the Engineering business, while the Core business was impacted by COVID-19 in the second half.
“The Group responded swiftly to the onset of COVID-19 with the health and safety of our people and customers paramount, along with measures to strengthen our financial position,” said Mr McCann.
A range of mitigating actions were implemented including cost reductions and a review of project expenditure. In addition, the balance sheet was strengthened significantly through issuing new equity and arranging additional debt facilities to enable the Group to manage through a potential sustained downturn and to take advantage of development and investment opportunities as they emerge.
“Notwithstanding the challenging environment, the Group advanced its strategic agenda in FY20. Significant progress was made on growing and converting the development pipeline, including securing additional major urbanisation projects, achieving important planning milestones and creating new investment partnerships to support projects moving into delivery. The Group has made good progress in finalising the sale of the Engineering business.”
Core business
Following a solid first half, a significant deterioration in operating conditions as a result of the impacts of COVID-19 led to a loss in the second half of the year. Delays were experienced in converting development opportunities across our urbanisation pipeline and the Communities business experienced weak trading conditions.
In Construction, the impact was greater in the international regions, particularly in cities where mandated shutdowns were implemented. This included lower productivity, projects being put on hold and delays in the commencement or securing of new projects. The Group’s investment portfolio was impacted by declining real estate values as a result of deteriorating market conditions. While the financial performance was curtailed, the development pipeline has grown along with the establishment of new investment partnerships.
“Our ability to deliver transformational urban precincts with a focus on financial, environmental and social outcomes is being recognised globally. Continued origination success during the year resulted in the development pipeline more than doubling over the last five years to above $100 billion,” said Mr McCann.
The Group added two new major urbanisation projects to its portfolio – Thamesmead Waterfront in London and a partnership with Google in the San Francisco Bay Area. These residential led projects have a combined estimated development end value of approximately $37 billion.
A new partnership was formed with PSP Investments, one of Canada’s largest pension funds to develop the $4 billion Milano Santa Giulia project. The 58,000 sqm Victoria Cross over station development in Sydney will be delivered in partnership with the Australian Prime Property Fund Commercial.
Post year end, the Group established an investment partnership with Mitsubishi Estate to deliver the first residential tower at One Sydney Harbour, Barangaroo South, which is expected to contribute approximately $100 million to after tax profit in FY21. Strong presales have been achieved at TRX Residences in Kuala Lumpur and One Sydney Harbour, Barangaroo South. There are more than 1,600 apartments for rent in delivery, with four additional buildings entering delivery across projects in London and Chicago.
“The ongoing conversion of our pipeline provides access to development opportunities and high quality assets for our investment partners. This integrated approach, along with our placemaking skills, provides a point of difference we believe few can match,” Mr McCann said.
The design and delivery capabilities of the Construction segment are critical to the success of integrated projects. In addition, the business is well placed to secure Government sponsored projects as part of potential stimulus measures across a range of sectors.
Lendlease also announced the launch of an ambitious environmental and social sustainability target with the Group committed to being a 1.5ºC aligned company, with market leading carbon targets of net zero carbon scope 1 and 2 by 2025 and absolute zero carbon, which extends to our supply chain, by 2040.
Non-core business
The sale of the Engineering business is anticipated to complete shortly, subject to the satisfaction of the final conditions. The sale price is $160 million, payable in instalments in FY21 including completion adjustments. The Group will retain three projects. The completion of NorthConnex is anticipated in the coming months and Kingsford Smith Drive is scheduled to complete by the end of CY20. As previously advised, the Cross Yarra Partnership consortium for the Melbourne Metro Tunnel Project is continuing to work with the Victorian Government on a confidential basis to resolve issues in relation to the scope and costs on the project.
Lendlease has previously disclosed a cost estimate to exit the Engineering and Services businesses of $450 – $550 million on a pre-tax basis. Lendlease now expects these costs to be approximately $550 million pre tax, with $525 million pre tax ($368 million after tax) accounted for in FY205 . The sale process for the Services business has been paused as a result of current market conditions. While the business has been performing well, it is non core and is expected to be divested in future periods.
Financials
The Group’s Statutory Loss after Tax of $310 million for the year ended 30 June 2020 included Engineering exit costs of $368 million after tax, along with $19m of goodwill impairment in anticipation of the completion of the sale of Engineering, and COVID-19 related impacts on the Core business. The Core business generated profit after tax of $96 million for the full year.
A solid first half with net profit after tax of $308 million was largely offset by the sharp deterioration in operating conditions following the onset of the pandemic, resulting in a loss after tax of $212 million in the second half. A range of measures were undertaken to strengthen the financial position of the Group. $1.2 billion of equity was raised through an Institutional Placement and Share Purchase Plan and $1.3 billion of additional debt facilities were arranged.
In addition, overhead and employee costs were reduced and project expenditure was reviewed. The Group entered the new financial year in a strong financial position with gearing of 5.7 per cent and $5.86 billion of liquidity.
Group Chief Financial Officer, Tarun Gupta said: “We remain focused on setting ourselves up for the future to deliver our growing pipeline of urbanisation projects and pursue investment opportunities. A robust balance sheet and available liquidity are paramount for this investment phase.”
Cash generation was strong with underlying operating cash flow of $762 million. This included apartment settlements across our development projects and the cash realisation of profit recognised on development projects in prior periods. In addition, PLLACes on Barangaroo apartment pre sales generated cash of $588 million. Adjusting for the $525 million of Engineering exit costs, cash conversion of underlying operating cash flow to EBITDA for the last five years, was 102 per cent.
The completion of the Engineering sale will result in a cash flow impact comprising a transfer of the working capital cash balance to the buyer, less sale proceeds in FY21.
As at 30 June 2020 the working capital balance was approximately $450 million. The cash outflow from the exit costs of $525 million accounted for in FY20 is expected to be incurred over the period FY21 – FY25.
Outlook
The Group advised that they entered FY21 in a strong financial position and well positioned to execute delivery of the global development pipeline and take advantage of new investment opportunities as market conditions improve.
“Our core business is at an exciting point with a development pipeline of $113 billion and a growing number of major urbanisation projects in our international gateway cities across the US and Europe in particular,” Mr McCann said.
Construction backlog revenue for the core business is $14 billion. Beyond the current backlog, there is approximately $8 billion of work for which the Group is in a preferred position, across both external and integrated projects.
“Our urbanisation pipeline is expected to create more than $50 billion of institutional grade assets for our investment partners and the Group’s investments platform. We are well placed to double our current $36 billion funds under management as this pipeline is delivered,” Mr McCann said.
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