Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lendlease market update. [Operator Instructions] I must advise you that this call is being recorded today, Thursday, 1st of July. I will now hand the call over to Mr. Tony Lombardo, Global Chief Executive Officer of Lendlease. Please go ahead.

Good morning, everyone, and thank you for joining today's call. Sitting here at Barangaroo in Sydney, I acknowledge we're on the land of the Gadigal people and extend my respects to their elders past, present and emerging. Joining me on the call is Frank Krile, Acting Group CFO. I'll provide some opening comments following the ASX announcement lodged this morning and then open up for questions. Today, we announced an update on our FY '21 financial performance for the core operating business and an update on the status of the noncore business. COVID-19 continues to negatively impact the business globally. As a result, we anticipate to deliver FY '21 core operating profit after tax in the range of $375 million to $410 million. We have taken a range of mitigating actions to help the group navigate this environment. However, the unpredictability of the pandemic has meant many global cities have been forced into extended lockdowns or reentered lockdowns during FY '21. London has extended its lockdown multiple times, which has impacted commercial and residential customers from inspecting new products and committing to leasing and purchasing and investment partners delaying investment decisions. At International Quarter London, there has been a delay in the expected timing of securing of an investment partner. Our discussions are still ongoing. At Elephant Park, the profit on the 2 residential full rent buildings, which was recognized in prior periods, has been impacted by an inability of prospective tenants to inspect departments and commit to leasing decisions. The 2 buildings, which comprise 663 apartments, were completed in late March and late May of this year, respectively. I want to emphasize that London is a key gateway city for Lendlease and has attractive fundamental value, and we believe in the resilience of the city. We expect to see a progressive return to pre-COVID conditions as London reopens. Notwithstanding COVID-19 impacts on the business, the group has successfully converted a number of key initiatives across our major urbanization projects, which contributed to the earnings in the second half of FY '21. In Sydney, we established a joint venture with Mitsubishi Estate to deliver the second residential tower at One Sydney Harbour, Barangaroo. Mitsubishi Estate will acquire 25% interest in the tower, which is expected to be a significant contributor to earnings in FY '21. Current presales for that project are 59%. In Melbourne, we forward sold the largest and final commercial building at Melbourne Quarter to the National Pension Service of Korea. Their investment will be managed by our funds management business. Medibank will be the anchor tenant in the premium-grade building for the next 10 years, taking 17,500 square meters of space. In Milan, we established a 50-50 joint venture with an investment partner for the development and long-term ownership of Phase 1 of the Milano Innovation District. Phase 1 comprises 150,000 square meters of mixed-use space and has an estimated end value of approximately $1.3 billion. Moving to the noncore business. Details have recently emerged on claims relating to historical projects completed prior to the sale of the Engineering business. While these claims are subject to dispute proceedings, which take time to evaluate, the group anticipates accounting for an additional provision in the range of $90 million to $175 million after tax in FY '21. We believe we have taken a prudent provision to cover these issues. For commercial reasons, I can't name or comment on the individual projects. However, I can confirm the exposure is primarily to projects completed prior to the sale of the Engineering business. The Melbourne Metro project, which is the only retained project in delivery, is progressing well and has not required any further provision. The Service business sale is progressing well with a number of bids currently being assessed. The group's statutory profit is anticipated to be in the range of $200 million to $320 million after tax. Finally, after commencing in the CEO role at the beginning of last month, I initiated a wide-ranging review of the business. That review covers the organizational structure, core business operations and further assessing the impact of the pandemic on the business over the short and medium term. I'm yet to complete that review, but we'll provide an update on outcomes at the full year results announcement on the 16th of August. I'll now open up for questions.

[Operator Instructions] Your first question comes from Stuart McLean from Macquarie.

My first question is just on what you finished up on there, Tony, just in regards to the business review and the short- to medium-term impacts. You just have to provide any color that you can there. Is there potential delays to hitting that $8 billion production target? Is there delays hitting the $20 billion of [WIP] delays and able to sell down assets that are due to be part of FY '21 key development projects? You just give a bit of some color there.

Yes. Look as, Stuart, I've stated, we are currently conducting that review. It will cover a number of the items that you've raised as questions today. I can't give you answers on that, but I will update you on the 16th of August as we complete that analysis. And it will look at the various sides of the state, the various impacts on COVID. We will give clarity on the structure, and we will give clarity on timing of how and when we see us hitting our production targets. But at this point, I can't comment any further.

And just maybe an extension of that is inability to execute on something like an IQL, something that plays into your thought process when you're doing the review and ability to attract commercial tenants and ability to attract capital in the current environment?

Yes. Definitely, we will look at our capital partners. We'll look at the interest they have across our portfolio. We're constantly in dialogue with capital partners, and that will give us a good indication of how we can look towards the future of bringing them into various projects across the globe.

Okay. And then second question, just on the -- it looks like write-backs at Elephant Park for the build to rent there. First question, you have to give an idea of the quantum there. And the second question is, does this change your view on accounting recognition of such projects and the idea of taking very significant profits upfront before completion of assets?

Yes. Look, Stuart, on this one, I must state, we completed these 2 buildings late March and late May. And London has extended their lockdown from April to the 19th of July. So we are right in the midst of COVID, and so looking at the impact to the business at the moment that we've had to take. We did have stabilization risk on these assets. As I said, they do relate to assets where we have taken profit in prior period. I think in terms of accounting, I've got to look at the risks associated with the business, but this is COVID-related from my perspective in terms of what has hit us at the moment.

Okay. So it doesn't change necessarily your view that taking 100% of -- or close to 100% of profits upfront kind of leaves the business susceptible to these sorts of risks?

I think when the team took on the risk, there was always assessments around stabilization risk, which we have taken on. And the team assessed it at that point in time in a pre-COVID world. And COVID, like all businesses like ourselves who are in the real estate game and renting up assets, has put an impact because we can't have customers come and see the product at this point in time because we're in lockdown. Now hopefully, as we get through and return to normal market in London, we see a ramp-up, and we're excited where London is in terms of vaccination, and we're hoping that the expected lockdown ends on the 19th of July, is we think that will give us some confidence to hopefully start getting better progress on the leases, but we'll update the market further on that as we get information and progress that leasing.

Okay. And then maybe just a final question from myself. You specifically called out development. Are there any other things to think about in terms of earnings for '21 in investment management in construction? Are there anything there, any of those line items that are underperforming expectations that have contributed to this $375 million to $410 million of profit?

No, I think we've called out today the big impacts, so the core result do relate to COVID, in particular, our U.K. business that we've called out today. I think everything else is lining up as with the expectations. But again, once we get through our audit, we will announce everything at the full year results on the 16th of August.

Your next question comes from Sholto Maconochie from Jefferies.

Just a few from me. Just on the guidance or sort of the range you've given, it's about 16% below the midpoint of consensus that your midpoint is. Just trying to see if there are other areas not doing as well, just on from Stuart's question. Because if you look at what you've landed, you've got Barangaroo, the Tower Two at One Sydney Harbor, that's circa $125 million plus you've got the Melbourne Quarter development and also Milan. So I'm just trying to see what's driving the core operations down given you booked -- they're quite lumpy profits at the back end of second half '21. Can you sort of elaborate on that?

Sholto, what I would say, it is the 2 items that we've called out in the ASX announcement, the 2 areas we didn't transact on IQL as we had hoped we're going to do. And we've had this impact on the stabilization of the 2 new assets where we've got the stabilization risk, and we've taken a view on that. And those are the 2 items that have impacted that result.

All right. And then -- so do you expect obviously July -- 19 July opening up to -- you should secure IQL in '22? And these issues largely resolve itself for those 2 projects in '22?

Yes. Look, IQL, we're in continuing negotiations with the potential capital partner. So I can't comment on how that's progressing, but we're hoping that we continue to progress that. All I'm going to say is, with COVID, it's very hard to call out the timing of when we can complete things because people, as I'm pointing out, are delaying decisions or changing decisions, so -- but we continue to negotiate with that capital partner.

And then just on the noncore stuff, like if you look at -- you announced it was posttax, but if you take the total provisioning to date on a pretax basis on the $550 million sort of a range of $679 million to $800 million. So it's another -- it's quite a material number. You book that range on the pre -- posttax $90 million to $175 million in '21 on a provision. So that's what's dragging down the statutory?

That's correct. Then we'll work with our auditors, and we'll update at the results -- the final provisions that we do book for August 16.

[indiscernible] And just on Stu's question, on the last point of the business, you said the impact of market uncertainties during the duration of pandemic and the operations of the short to medium term and I don't want to put words in your mouth, but it sort of implies that it may be a rebase of profit. Obviously, the pandemic has put you probably 18 months behind where you thought you'd be in August last year when you had announced the strategic review. Is that something you guys are looking at in terms of how the business just smoothes those problems rather than take them upfront? And is that what that last point is alluding to in terms of proper recognition as well?

So I won't give an outlook statement, but what I'm announcing there is we are looking at the business. We have had projects which have been stopped because of lockdowns and the like. So we're looking at all aspects of our operations and where we've had prolongation costs or impacts, and we're looking at how that's going to impact the current short- to medium-term outlook, and we'll provide that clarity on the 16th of August at our results announcement.

Right. And just finally, did you -- on the gearing range that's you said at the bottom end. Have you done a places transaction as well in combination with the Tower Two at the Barangaroo?

Yes, we did do a places transaction, and we'll provide that clarity. But Frank, do you want to update further on that.

Yes. I think, Sholto, at the first half, we said we're being in the sort of bottom half of the target gearing range. So I guess we had big contributors in the second half. We've obviously completed the 25% sale of the retirement business, which we did flag at the time. But in addition to that, we have done a places transaction on the second tower at Barangaroo. And then across some of our projects, there has been some production deferrals on the back of, I guess, the impact of COVID and the lockdown in some of the global cities in which we operate.

Your next question comes from Simon Chan from Morgan Stanley.

Guys, I just want to clarify a couple of things. Firstly, Elephant Park, you said there are 2 buildings finished, one in March, one in May and conditions are worse than expected, hence, the impact on previously booked profits. Are there any more buildings, say, due to be completed over the next 6 to 12 months, where you have already booked profits that we should keep an eye on because the conditions in the specific markets aren't as good as what they were when you book the profits?

Simon, on that one, I would say the impact, again, are COVID-related on the appropriate assumption we're taking, but COVID had impacted our ability to lease up. We did take on the stabilization risk. So that is what's happened and impacted the result. On other products, what I would say with these were the first forward sale deals that we did as we were looking to build out our build-to-rent product in London. What I would say, some of the other deals we've looked at are on a more of a development joint venture basis, but I can't comment on exactly the timings and the risks in each one, but we'll continue to make sure we update the market accordingly if something changes and an impact like COVID or an event occurs on the impact to our results.

And then timing-wise on the, I guess, future build-to-rent buildings in the U.K., they're not expected to complete until FY '23 and beyond.

Yes. So this -- I'm just looking at -- I don't recall the structure of the cascade at Lakeshore East, but that one was profit forward booked in that one? Or was that under a different structure?

No. There was no profit forward book and those buildings -- Frank?

That was a deal that was originated upfront in a joint venture structure with our capital partner.

Okay. So it's unlikely we will see this [indiscernible] happen again in FY '22 then essentially?

All I can say is this has happened on these buildings. If anything happens on any other development, we'll update the market accordingly at the right time.

That's very clear. Just skipping to engineering now, the $90 million to $175 million, is that related to that one claim? Or did you actually use this as an opportunity to reevaluate the provisions taken up across the entire engineering business, which has been sold?

No. What -- as I've pointed out in today's announcement, the details that have recently emerged on claims relating to historical projects that we've assessed in the business. And again, we -- on all these claims, they're dispute proceedings, and we've been evaluating these issues. So these provisions are going to relate to those matters, and we've had to take that additional provision of $90 million to $175 million. We'll work through that with the auditors, and we'll give a final position on that at the 16th of August results announcement.

Okay. Well, I'll wait few weeks. And just the last one. You guys, last year specifically, called out $150 million for Tower One at One Sydney Harbour EBITDA. Just wondering if you guys can elaborate on that for Tower Two? And also the profits book for Melbourne Quarter forward sale today?

Yes. I would just say on the Tower Two, I would expect that the profits are in line with that first quantum that we booked in Tower One and on the MQ 2 deal.

Yes, I mean, I can't get into specifics on individual transactions and profits on individual transactions. We're still working through our year-end process and it's also subject to our audit final. Hence why we have, I guess, a range with that core operating profit that we've come out with today.

Your next question comes from Tom Bodor from UBS.

I was just wondering if you could talk to One Sydney Harbour, Melbourne Quarter and Milan and whether any of the profits from those 3 transactions will partially fall into '22 or is it all contained within FY '21?

I would say on the One Sydney Harbour, we're booking the profits according to what's today on that deal in the FY '21 year, Tom. So that's the One Sydney Harbour.

So on One Sydney Harbour, there will be a development management fee that gets booked during delivery, but the remaining profit will get booked on settlement of the building.

Okay. So the majority of that, though, like the -- the profit stemming from the partnership is all in '21?

Correct. Yes.

And then Melbourne Quarter and the Milan transaction, are they 1st of July or 30 June?

Those 2 transactions have been booked in FY '21, the profits associated with those.

And then...

I guess they are slightly different, Melbourne Quarter is a fund through transaction. So it is, obviously, in line with the previous fund raise we've done. There's an upfront profit element and then there's a development management fee that gets booked through delivery. And then on MIND, we're booking, I guess, the premium at which our partner is coming into the JV upfront.

Yes. That's clear. Also, can you talk to which projects in the engineering business the additional warranty claims relate to?

Tom, I can't talk to which project. It is commercially sensitive as we're working through various disputes.

Okay. And then finally, I just wanted to understand sort of, as part of your review, if you see, with part of this restructure, is it likely to target overhead costs?

I think the 3 key elements of targeting an organizational restructure. So we are looking at simplification and efficiency of our structure. We are looking at the whole operations and just looking through and understanding to make sure we understand the full impacts of COVID. So they're the 3 key things and I'll provide an update at the 16th of August results.

Your next question comes from Richard Jones from JPMorgan.

A couple of quick ones. Just the Elephant Park kind of work back of the profit, can you quantify roughly what amount that would be?

On that, Richard, we won't be commenting on the exact impact. Again, we're still working through audits on a number of matters. So we're calling out that's the reason for the impact. But again, we're still going to go through our audit process.

Okay. Secondly, I look at consensus for next year, operating profit hits north of $600 million. Any comment on that?

Again, I'm not going to be providing any outlook or guidance. I think the key is, on the 16th of August, I'll update the market on the review I'm currently doing.

Okay. And then just in terms of the investment division, can you clarify whether APPF Retail has reinstated the dividend? And would you expect, as a result, the divisional earnings to be significantly improved on the first half?

All I would say is on the investments line, I think the second half has performed better than the first half. And again, we will provide you with more detail as we come to the full year results. On your question on the dividend, I think we'll provide an update again at the full year results. But I think most of our different funds have looked at dividends throughout the year. So I just can't comment exactly on that question now.

Your next question comes from Ben Brayshaw from Barrenjoey.

My questions have actually been answered. So nothing from me this morning.

Your next question comes from James Druce from CLSA.

Just curious to see how much of that $500 million provision has actually been used up now?

So what I would say that the $500 million provision has been allocated against risks that were in the business. What we've done today is we've had -- as I've stated, we've had details recently emerge on claims that are on historical projects that we have completed prior to the Engineering business sale, and we've taken time to sort of -- we've looked at the claims subject to the dispute proceedings that we've got, and we've valued that. And therefore, we've needed to look at an additional provision in the range of that $90 million to $175 million after tax.

Yes. No, no, I understand that. I'm just wondering how much of that original $500 million has actually being paid out in cash. If you could provide an update there.

James, that's something we'll cover as part of the full year results in August.

Yes. I mean I would say we're still completing Melbourne Metro as a project. And of course, there will be cash required to continue to complete that project over time.

Okay. I appreciate this is subject to legal proceedings, but how can you have a claim on a historical project when it's completed? Won't all claims finalize at the time of completion?

Yes, and I can't get into the details, but the dispute is ongoing on a number of matters that we're evaluating and that we're having to deal with. So they are commercially sensitive, so I can't go through those details.

Okay. And can you confirm whether or not there's a provision for the FY '21 recent restructure?

On restructure, I'll provide a full update. At the moment, there's no provision in our results. So anything that we look to do, that we'll be looking at the future. So we'll provide any updates on that business at our results on the 16th of August.

Okay. I might crack in 2 more, if that's okay. Just on Chan's question, can you just talk through some of the major projects completing in FY '22 then?

I don't have the details of its project, Frank, the key ones that are coming up are going to be Ardor Garden in Shanghai. We do have Lakeshore East as a couple of key residential projects that are coming up in FY '22.

Okay. And then finally, just AUM today, where are we kind of up to for the external management business?

We just can't comment at the moment, but we're finalizing all our valuations and everything so we just done to audit, but we'll give a full update on that at the results.

[Operator Instructions] Your next question comes from Alex Prineas from Morningstar.

Just wondering in relation to the provisions, we had quite a long period there where the provision amount remained stable and now it sounds like the provision increase relates to a number of different projects. So does that sort of imply that it's more related to an internal review rather than any new information arising from outside the company? Any comment that you can provide as to why it's several projects at once?

So again, I would just say it's details have recently emerged on claims just relating to historical projects. There's recent things that have been coming up. So again, these things do take time to evaluate, and we have been working through those things. And we've had to take the additional provisions at this point that we're calling out the range of $90 million to $175 million. And again, we can't comment on each of the individual matters just because they're commercially sensitive.

There are no further questions at this time. I'll now hand back to Mr. Lombardo for closing remarks.

Thank you all for attending today's update, and I look forward to giving you a full update at our upcoming results on the 16th of August. So thank you, and good morning.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.