Lendlease have released their FY21 financial results which reflect the impacts from COVID on their global business.
Global Chief Executive Officer, Tony Lombardo said, “As an international real estate group with a presence in targeted global gateway cities, the pandemic has had a significant impact across each of our markets and operating segments. Despite COVID impacts, profit recovered and the Group made significant strategic progress.”
The Development segment experienced production delays, with ongoing impacts on leasing and sales across active projects. A $60m pre tax provision was taken following weaker rental demand and lower rents for the recently completed apartments for rent buildings at Elephant Park.
Notwithstanding COVID impacts, several key initiatives were progressed including an investment partner being secured for the first two residential towers at One Sydney Harbour. These initiatives underpinned an improvement in Development ROIC to 7.2%, albeit still below target.
Construction activity was constrained by delays in the commencement of new projects, site shutdowns and lower productivity. The impact of social distancing protocols across our sites was reflected in a 16% decline in revenue compared with a 9% decline in hours worked. Despite these COVID related impacts, the segment delivered a good result. The EBITDA margin rose to 2.7%, towards the upper end of the target range of 2-3%, aided by disciplined cost management.
The Investments segment generated a return on invested capital of 5.9%, just below the target range of 6-9%. Investment management earnings were resilient, although lower due to a significant performance fee in the prior year. Returns on the Group’s investment portfolio were also impacted by disruption across underlying assets including co-investment yields being impacted by c.$40m2 in rental assistance provided to tenants across the platform.
The Group entered FY22 in a strong financial position with gearing of 5.0%. This provides capacity to support the Group’s strategic priorities. During the year, several strategic divestments were completed, enabling greater focus on areas where our competitive edge is strongest. Post balance date, an agreement was also entered into with Service Stream for the sale of the Services business for a purchase price of $310m.
Acting Group Chief Financial Officer, Frank Krile said: “The Group enters FY22 with gearing below our 10-20% target range, providing the Group with significant funding capacity. The strategic divestments executed throughout the year, together with our balance sheet strength, puts the Group in a solid position to navigate through further COVID uncertainty.”
Tony Lombardo said, “As an international real estate group, we expect FY22 to be the cyclical low point for both development production and profitability. We are targeting to deliver solid returns across the Construction and Investments segments, although activity levels are likely to continue to be affected by the pandemic” .
In FY22, Lendlease anticipate returns will be
- Development ROIC: 2 – 5% v target of 10 – 13%;
- Construction EBITDA margin: 2 – 3% v target of 2 – 3%; and
- Investments ROIC: 5 – 8% v target of 6 – 9%.
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The REIT commenced the year with a security price of $11.56 against a NAV of $10.08 (15% premium to NAV) and closed the year at $10.54 with a NAV of 10.09 (4% premium to NAV). The REIT provided a 27c distribution for FY21, equating to a 2.34% yield, which together with a -8.8% drop in unit price provided investors with a total return of -6.5%.
Key financial and operational highlights for the period are:
Financial highlights:
- Statutory Profit after Tax of $222m
- Core operating Profit after Tax of $377m, up 83%
- Full year distributions of 27 cps, payout ratio of 49%
- Final distribution of 12 cps
- Earnings Per Security of 54.8c, up 60% and Return on Equity of 5.4%
- Non core loss after tax of $181m, including additional provision of $168m (after tax)
Portfolio update
Strategic Priorities
The Group made substantial progress on its strategic priorities, with a number of additional projects and partnerships secured across our focus areas in the Development and Investments segments.
A total of $8.4b was added to the development pipeline, including six urbanisation projects with an end value of $7.4b:
- Smithfield Birmingham to provide more than 3,000 new homes;
- 60 Guest Street, Boston to become a state-of-the-art life sciences building;
- 1 Java Street to transform a New York city block into apartments for rent;
- La Cienega, our first urbanisation project in Los Angeles;
- Inaugural development for Lendlease Data Centre Partners in Greater Tokyo; and
- Certis Centre Singapore, involving the redevelopment of two office buildings.
Investment partnerships worth $5.1b were formed across five projects. This will drive growth in funds under management, including exposure to the rapidly growing sub sectors of Life sciences and Data centres.
Business Review
A wide-ranging business review commenced by the CEO following his appointment is yet to complete, although preliminary findings have been reached. The strategy and strategic priorities have been confirmed. The Group Core Operating ROE target range of 8-11% is anticipated to be met by FY24.
The revised organisational structure is designed to create a more consistent operating model across all regions, embed an enterprise wide approach and streamline group functions. Targeted cost savings from the revised structure are greater than $160m annualised, with benefits expected to be realised from H2 FY22. An estimated restructuring charge associated with the revised organisational structure of $130m to $170m pre tax is expected to be accounted for in H1 FY22 Statutory Profit.
“The recently announced changes to the organisational structure better position the Group to accelerate development production, continue to deliver our construction backlog and grow our Investments platform in a more focused and efficient way”, said Mr Lombardo.
The review of the development portfolio reaffirmed its underlying strength, underpinned by a capital efficient business model:
- $8b+ per annum production and 10-13% ROIC targets are anticipated to be met by FY24
- Refinement of investment partner approach to drive improved alignment between development profit with risk/reward and cash flows from FY22.
As part of this exercise, a small number of projects have been identified where a material change in development strategy is under consideration. A range of strategic options is being considered to expedite the release of capital on these projects. Pursuing these options is expected to result in an estimated impairment expense in H1 FY22 Statutory Profit of $230m to $290m pre tax, representing 5-7% of current Development segment capital.
“The review of the development portfolio reaffirmed the underlying strength of the $114b development pipeline across targeted gateway cities. We are confident that production will accelerate to more than $8b per annum by FY24”, said Mr Lombardo.
Outlook
The enforced lockdowns from the COVID pandemic continue to have significant ramifications for real estate markets across the global gateway cities in which the Group operates. While we are confident these cities will rebound strongly over the medium term, FY22 is expected to be a challenging year.
In FY22, Lendlease anticipate returns will be
- Development ROIC: 2 – 5% v target of 10 – 13%;
- Construction EBITDA margin: 2 – 3% v target of 2 – 3%; and
- Investments ROIC: 5 – 8% v target of 6 – 9%.
Statutory Profit in H1 FY22 is expected to include a restructuring charge and impairment expense, based on outcomes arising from the business review, in line with the estimates outlined above3
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