Lendlease’s Pivot to Projects continues

22 February 2021

Lendlease’s continues its’ progress with major urbanisation projects across the globe gaining traction, however the short term COVID disruptions put a dent into earnings as tenant demand and lower investment partner appetite eat into the office sector.

In releasing their 6 monthly results this week, Lendlease announced that core operating profit after tax for the 6 months to 31 December 2020 was down -26% on the prior corresponding period to $205 million. Core operating earnings per security was 29.8 cents and return on equity was 5.9%, below the target range.

Retiring CEO Steve McCann said “Our Core business is at a pivotal point, with a development pipeline of $110 billion and a growing number of major urbanisation projects.”

“The Group has displayed resilience through a very testing period with a recovery in operating conditions gathering momentum towards pre COVID-19 levels.”, said Mr McCann

“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 expect to more than double our current $38 billion in funds under management as this pipeline is delivered,” Mr McCann said.

Lendlease have implemented a range of mitigating actions to help navigate this environment and to take advantage of potential development and investment opportunities.

Lendlease have joined with Aware Super to embark on two transformation projects in the US. In New York, 1 Java Street Lendlease will transform a city block into apartments for rent with an estimated end value of $1.0 billion. In Los Angeles, Lendlease has secured its first urbanisation project at La Cienega Boulevard with a project that has an estimated end value of $0.8 billion and will include a mix of apartments for rent and office space. Both projects will add to Lendleases’ Investments segment.

Returns for the Development segment were impacted by COVID-19. While progress was made on converting opportunities across the Group’s urbanisation pipeline, uncertainty continued to affect both tenant demand and investment partner appetite in the office sector. Residential product
commenced delivery at TRX in Kuala Lumpur, Ardor Gardens in Shanghai and 100 Claremont Avenue in New York. The creation of an investment partnership to deliver the first residential tower at Barangaroo was the largest contributor to the segment result.

The Construction segment delivered a solid result as the business rebounded from the significant COVID-19 disruptions experienced in H2 FY20. The portfolio performed well with returns at the top end of the target range, aided by cost management and projects either nearing or reaching
completion. Revenue was constrained, with activity affected by ongoing productivity impacts across sites and delays in the commencement of newly secured work. New work secured of $4.9 billion was up from $3.1 billion, with the Australian and European businesses benefitting from social
infrastructure activity.

The Investments segment recovered from the worst of the COVID-19 impacts, although returns were below the target range. Compared with H1 FY20, Management EBITDA declined as a result of reduced asset management fees, predominantly related to the retail sector. Funds management fees in the prior period also benefited from a substantial performance fee. While the Group’s investment portfolio is well diversified, lower returns from the Retirement Living business and the Group’s retail investments weighed on Ownership EBITDA.

Strategic Progress

The Group made progress on its strategic priorities with completion of the sale of the Engineering business to Acciona, and the sale of the US Telecommunications and Energy businesses.

Also as was announced last week, the Group made further progress in realigning its exposure to the retirement sector with a Aware Super acquiring 25 per cent of the Retirement Living business at book value.

The capital from these divestments will be redeployed into other opportunities aligned with the Group’s strategic priorities.

Investment partner initiatives were progressed with development joint ventures established across three urbanisation projects: the first residential tower at One Sydney Harbour and the two urbanisation projects in the US, with a combined end value of c.$4 billion. The two US projects will
support growth in funds under management and future investment product. Two bold sustainability targets highlight our focus on maintaining a leadership position in this area.


The Group’s statutory profit after tax for the period ending 31 December 2020 was $196 million, down 37 per cent. This included a loss of $2 million for the Non core segment and a loss of $7 million from property revaluations in the Investments segment.

The result for the Non core segment reflects the performance of the Services business, the Engineering business prior to the completion of the sale, the retained engineering projects post the sale and remaining exit costs.

Total proceeds from the sale of the Engineering business are estimated to be $197 million, comprising the agreed sale price of $160 million and additional estimated completion adjustments of $37 million. A working capital cash balance of $411 million was transferred to the buyer upon
settlement. The Group entered the new calendar year in a strong financial position with gearing of 12.9 per cent and $4.7 billion of liquidity.

The interim distribution per security of 15 cents was declared, representing a payout ratio of 50 per cent of Core operating profit.

Acting Group Chief Financial Officer, Frank Krile said: “To align more closely to the strategic priorities of the Group, refinements were made to the financial strategy and Portfolio Management Framework during the period. We remain focused on providing the financial capacity to deliver our $110 billion development pipeline, while continuing to pursue attractive investment opportunities.”

Underlying operating cash outflow was $735 million. The establishment of the development Joint Venture to deliver the first residential tower at One Sydney Harbour resulted in an approximate $500 million decrease in the underlying operating cash flow and an equivalent increase in underlying investing cash flow. There was also an approximate $200 million operating cash outflow from the Non core segment.

The cash conversion ratio to operating EBITDA over the five years to H1 FY21 was 86 per cent.

Our Views

LendLease have had a challenging few years as they re-focus their strategy to take advantage of the core capabilities; managing and delivering urbanisation projects and investments for client capital.

Lendlease are exposed to residential, retail and office sectors most of which are feeling the disruptions from COVID19.

Once COVID impacts have washed through, Lendlease’ strategy is sound and should provide growing FUM and earnings. At present LendLease are not on our recommend list.

The decision to offload a further stake in the Retirement Village business is applauded and whilst Lendlease would have preferred a 100% exit, holding a 25% stake but earning full management fees is a good alternative.

Lendlease hope to use their capital more efficiently with its Development pipeline going forward preferably secured via a land payment structure where there is less of a reliance on fixed staged payments and more reliance on flexibility, enabling amongst other things for development to be paused in uncertain times.

The model also enables Lendlease to profit from the upfront introduction of partner capital to assist in the funding of the development works.

Lendlease have not provided any earnings guidance for the balance of FY21.