Lendlease Group (LLC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Lendlease's Market Briefing on the Lendlease U.K. Development joint venture. [Operator Instructions]. I must advise you that this call is being recorded today, Monday, 19th of May 2025. I would now like to hand the call over to Mr. Tony Lombardo, Group Chief Executive Officer. Thank you, Tony. Please go ahead.

Good morning, and thank you for joining today's market briefing. I'm Tony Lombardo, Group Chief Executive Officer and Managing Director of Lendlease. With me is Simon Dixon, Group Chief Financial Officer; and Tom Mackellar, CEO of Development. In May last year, we announced an updated strategy to simplify the group and recycle $2.8 billion of capital in FY '25 and to accelerate the release of capital from our offshore development projects and assets. In line with that strategy, I'm pleased to announce we've agreed to enter into a landmark partnership with the Crown Estate for a new 50-50 joint venture that will include 6 of Lendlease's development projects in the U.K. The establishment of the JV is subject to conditions precedent, including public authority consents with parties working to satisfy these conditions precedent during FY '26. This partnership will create an industry-leading alliance with deep sector experience, and we believe create value for our security holders, communities, clients and partners. The Crown Estate is an independent commercial business that holds more than $30 billion of core land and real estate asset holdings across the U.K. and is tasked with returning its profit to the U.K. government. They are an ideal partner for Lendlease to unlock value within our high-quality U.K. development portfolio and accelerate the release of capital. This will be achieved by partnering with the Crown Estate to progress the master planning and entitlement of around 26,000 new residences and more than 900,000 square meters of prime sustainable office and life sciences space. The transaction is expected to release more than $300 million of development capital when the transaction is completed, slightly above Lendlease's current book value. It will also halve our share of future funding commitments, which will further reduce Lendlease capital commitments by another $125 million. Additionally, remaining funding commitments to progress master planning and entitlement across the portfolio are expected to be self-funding through the anticipated sale of entitled land plots to third-party developers. Lendlease will act as master developer for the joint venture and will receive development management fees for these services on a cost-plus and performance basis. After 3 years, both joint venture partners will have the right to each sell down a 25% interest in the joint venture. Additionally, both partners will have the right but not the obligation to pursue vertical developments once planning milestones have been achieved. For example, Lendlease may choose to participate in the development of new investment product across build-to-rent, life sciences and sustainable office assets within the portfolio in support of its international investment management platform. Any election by Lendlease to participate in vertical development would require an initial minimum equity commitment of 10%. Lendlease's participation in vertical development would provide it with an additional development management rights for the project, earning a percentage fee on the total development value. In addition, when the investment product is completed, Lendlease will continue to earn investment management fee streams. Lendlease's interest in the joint venture is expected to be earnings accretive in year 1 with the benefit of interest cost savings and development management fee streams on a cost-plus and performance basis as master developer for the joint venture. This is also potential for Lendlease to receive future performance fees subject to planning, valuation and project outcomes. Lendlease expects its returns from the joint venture to exceed the group's cost of equity. If any vertical development is pursued, it will also be on the basis it exceeds the group's cost of equity and will be assessed against the group's capital allocation framework. The release of more than $300 million of capital at slightly above book value brings Lendlease's total of announced and completed capital recycling initiatives to $2.5 billion in FY '25, out of a target of $2.8 billion and provides additional progress towards launching a security buyback. This partnership leverages our expertise in delivery city-shaping urban regeneration while unlocking value for our security holders within our high-quality U.K. development portfolio. Positively, it will also accelerate the release of capital for the group, in line with our strategic objectives and commitments to our security holders. In other operational updates, I'm pleased to announce that an investment mandate secured earlier in the year for the management of $1.2 billion Australian office asset has now commenced. Mandate for Aurora Place in Sydney is on behalf of an existing client, the National Pension Scheme, NPS, from South Korea and was secured as part of a competitive process. This is an endorsement of Lendlease's investment management capabilities in Australia from a major global investment partner and brings Lendlease's funds under management of Australian office assets to approximately $20 billion with circa 80% in Sydney out of our $50 billion-plus funds under management, as we continue to increase scale across our Australia and international platform. Lendlease is a leader in the investment management of prime and A-grade sustainable office assets in Australia with a strong presence in the Sydney market. This news also follows Lendlease's recent introduction of 2 new investment partners into 21 Moorfields in London, leveraging our local and international capabilities. Lendlease remains committed and focused on driving the performance of its funds and mandates across its Australian and international investment management platform. Thank you, and we'll now open up for analyst questions.

[Operator Instructions]. Your first question comes from David Pobucky from Macquarie Group.

Just the first one on the $300 million of proceeds. Just wanted to clarify whether you have any other funding requirements across the rest of the business or will the proceeds be used to pay down debt initially?

Yes. I think, firstly, we've highlighted, if you look at the ASX release this morning, we did do a property -- a project and capital summary. So we were projecting out that the total funding for this part of the portfolio would be in the vicinity of somewhere between 604 to 644 by 31 December 2025. So there is some CapEx that the group will be spending as we continue to progress various commitments that we have with our government partners, and that's in regards to planning, site-wide infrastructure and the likes. What we will assume is when we do complete that 300-or-so on completion, Lendlease will use those funds to pay down debt.

Yes, that's right. And to Tony's earlier point, at the joint venture level in terms of progressing master planning that is expected to be self-funding through ongoing land sales.

And just the second one on the $10 million to $30 million contribution in FY '26. Do you expect that to flow through to OPAT or is that asset level profit? I know you mentioned you expect this to be earnings accretive in year 1.

Yes. On completion of the transaction, we are anticipating there will be some profits, and we would, on completion, give a clear indication of those profits that we will generate. Going forward, the biggest thing for forward earnings, you'd start to see a lower cost of funding for the group, and the group will earn development management fees and the margin on those fees of circa 30%.

And just the final one before I turn it over. You're not obligated to undertake future development. So I just wanted to understand the likelihood and your thinking around participating in that vertical development versus selling down in the 3 years post the establishment of this JV?

And I think, David, on that last point is firstly, we put it through our capital allocation framework. It needs to earn above our cost of equity as we've clearly articulated to the market. If we do decide to make that decision, Lendlease will participate in that development. We are committed to then put in 10% of that equity. Our partner, Crown, if they participate, would put in 50% and Lendlease would look to find another 40% from our international and Australian investment management partners. So -- and that will then allow us to continue to scale up our investment management business going forward internationally. But as you pointed out, it's just the right. There's no obligation. And so we'll assess every opportunity with the capital framework we've established and [indiscernible] exceeding our cost of equity.

Your next question comes from Simon Chan from Morgan Stanley.

Tony, you're not teasing us here with a potential return into international developments, right? I mean in May last year, right, about a year ago, that bucket of assets was land management agreements to be revised, you're going to satisfy planning obligations and you sell all the parcels of land, right, pretty clear, right? Now it's a joint venture and you've left yourself the option of going back into vertical developments, right? Like -- so are you actually getting back into international developments?

So the joint venture we've announced today is across being the master developer. So that's one. And when we announced the strategy 12 months ago, what we were very clear is that the master development had significant obligations, which would see Lendlease manage those obligations for 4 to 5 years, potentially we continue to do what we needed to do for our key clients and customers there. Today's announcement is positive because fast forward 12 months on to today, we're now bringing back $300 million of that capital, which we didn't have any certainty to bringing back previously, so it's a positive one. We'll continue to fulfill the master development obligations and look to sell down and realize capital. What we have done is make sure we've given ourselves optionality if we felt in our investment management platform there was product that was in excess of our cost that would deliver above our cost of equity, we have the ability to participate. So it creates that optionality for the business to go vertical in the investment management platform.

Fair enough. And in your ASX release, you talked about how -- this is right at the bottom of the front -- first page, you talked about how it is anticipated that entitled landlords should be able to be sold to third-parties. What do you -- is there any something funny with the wording? What do you mean it should be able to be sold to third-parties? Well, look, why wouldn't it be able to be sold to third-parties?

We've got various obligations with our partners, and it's very important to make sure that we're speaking to the borrowers that we deal with and making sure that that's fine. So it's not trying to be tricky. It's just been stating the obvious that there's partnerships and it's making sure with our partners that they are fine with us continuing down that pathway.

Cool. And just one last one for me. Any updates as to the rest of your capital release unit strategy? I think originally, you were targeting $4.5 billion of asset sales across 2 tranches, a $2.8 billion and a $1.7 billion tranche. You've done $2.5 billion now. How is the rest of the $2 billion looking?

Yes, I think we have 3 other key processes that we talked about that being Retirement Living Australia; Retirement Living, which is Ardor Gardens in China; and also TRX. So they're all ongoing processes with bidders in each of those processes today as we run through them, and we're continuing to progress them. So hopefully, in the not-too-distant future, we'll come back to market with some updates on that program. But you are right, we called out that we were targeting 2.8 in FY '25 and we've now achieved 2.5 based on completed and announced transaction.

Your next question comes from Tom Bodor from UBS.

I'd just be interested in how much residual overhead is in the EMEA region now once this transaction gets done or does it actually cover the overhead now within the projects?

Yes. I think that's a good question, Tom. What we've done is over the year, we've progressed a significant amount of cost out. So where we sit today, we're actually above that $125 million target we've set to us that for the FY '25 year. So that's pleasing. The overheads associated with managing these projects will be covered under the development management agreement. So as we pointed out, they'll be done on that cost-plus plus a margin of circa 30% for the resources that we maintain to deliver on these obligations. So it's a very good outcome because the cost now is fully funded with a 30% margin on it.

Okay. But you've now still got the Italian projects and IM business there. Is there some unallocated overhead associated with the EMEA region that's not covered after this transaction?

Yes. So you're right to call out, there are the U.K., and we're working through strategies around -- sorry, the Italy. There is Italy assets that we are working through strategies there, and we're working on what's the appropriate level of cost. So at the full year results, we'll provide an update on how we see Italy playing out. Investment management, we've factored that into the global platform that's now been put together over the last 12 months. So those costs are covered in how we are managing firstly, the investment business under the cost of sales and then our overhead to deliver our targeted EBITDA margin there at 40%-plus.

So would the overhead in the U.K. be less than $10 million now outside these projects like unallocated overhead in the U.K.?

Yes, I don't have the exact number, and I will come back to you, Tom, on that detail, and we'll provide again more color at the full year results.

Your next question comes from Suraj Nebhani from Citigroup.

Just a quick one on funding requirements, you've called out $110 million to $150 million funding to 31 December 2025. Is that something, Tony, I believe you were referring to self-funding in the opening remarks. Would you say that -- is that additional capital Lendlease needs to allocate or is it self-funding?

Yes, so we've allocated a certain amount of capital that we knew based on site-wide costs and the like we need to fund. So we're just forecasting out what that CapEx balance should be across those 6 key projects that we're talking about as part of the joint venture. As you're pointing out rightly that we will aim to deliver land sales and the like, which will also help support some of that funding. That's why we put out a range because it really is dependent on how we execute some of those land sales and the like as we progress the strategy over the coming sort of 6 to 7 months leading up to the 31 December 2025. We would anticipate, as I called out, the transaction closing in FY '26, and that will see Lendlease circa bringing back the 300 capital that we [indiscernible].

Understand. And I think there was some wording around additional progress towards a buyback. What's the latest thinking there? Obviously, it sounded like out of the $2.8 billion, $500 million was allocated to a buyback. So yes, I guess, keen to understand the latest thinking there.

Yes. I think the key for us, we've set a couple of key principles to announce that buyback. And firstly, we called out the need to deliver $2.8 billion of capital recycling and also have certainty that, that capital and those transactions will close within the marked respective time frame. Secondly, we said -- we updated our gearing range to that 5% to 15% and we stated by the end of FY '26, we would like to have our projected forecast showing that we'll get back into that gearing target range, once we're comfortable that we satisfy those 2 key objectives, that will give us the ability to then come back to market with launch of the buyback.

Yes. So I mean, Suraj, I think it's -- that's the right summary. It clearly takes us one step closer. The transactions that are in that $2.5 billion that are yet to close are obviously the transaction that we've announced today and also the Capella transaction. So we're waiting for cash to close those 2 settlements or certainty around cash closing those 2 settlements and the timing. And the other -- of those 3 transactions that Tony mentioned earlier on TRX, on Ardor Gardens in Shanghai and on Retirement Living Australia, clearly, we want to see sort of further progress across those 3 large capital recycling initiatives.

I understand. And one final one for Tony, again. Clearly, this is a joint venture sale, not a 100% sale. I know you guys have retained optionality for future development. But keen to understand like were there other offers on the table or did you see this as a potential to strike a deal early, get some capital back? I'm just keen to understand the strategy to get 50% and not 100% out.

Yes. Look, I think the most important thing was 2 things when we looked at trying to solve for the land management agreement. They're long dated. They are contractual. So what we were looking for was the right partner and by being able to secure Crown Estate that brings to us the best, I believe, partner that we could have to support us on that. So firstly, that was one. We were looking to ensure -- we said this was probably a 3- to 5-year proposition to release capital as loan management. So to be able to announce today the certainty around bringing back 300 of that capital at or above its book value, we feel that that's a very good outcome for our security holders. So we took those 2 things as key objectives and principles. We have got, as we pointed out in the agreement, some flexibility to sell down post 3 years another 25%. So that's built into the agreement. So I think all in all, I think that's a great way for us to realize capital without, from my perspective, destroying economic value, and I think it's the best outcome for our security holders.

And just one that makes sense. Just one final one. I don't want to hop all the time, but just one final one on international development. Any -- I guess, is there any aspirations there to do international development? Or is it this particular deal where you'll see that as a potential outcome, so you're happy to do it, but not otherwise?

Yes. I think what we've created under this agreement, Suraj, is the flexibility to participate in the vertical development via our investment management, and we've limited our minimum co-investment to 10%. So if we were to participate vertically, we would need to -- firstly, Crown would commit 50 big Crown estates, we'll commit 50 and we would need to find another partner for 40 for us to give ourselves certainty to participate under that arrangement that we'd agreed.

Your next question comes from James Druce from CLSA.

We're 40 days to the end of the financial year. I was just curious if you could give us a guide to where you think your gearing is going to wind up on that 15% to 20% guidance you gave at the half year?

James, perhaps we didn't give guidance at the half year on where gearing would land for the full year. Our expectations are that gearing will be lower at the full year as compared to the half year. So we're trending in the right direction. The guidance we have given is that we expect to be back within the revised range of 5% to 15% range by the end of FY '26.

Okay. And is there anything that sort of hasn't gone to plan in terms of cash inflows over the last couple of months or is getting a bit held up, do you think?

A lot of moving parts, nothing that hasn't gone to plan per se. So we're managing sort of outflows on production and other areas across the group. We've got obviously inflows coming in on settlements on apartments, we've got inflows coming in on a number of these key capital recycling transactions. But no, there's nothing which is unusual at this stage. But as I sort of said that at the half that we are managing -- we are bringing gearing down. We do expect gearing to be lower at the full year as compared to the half. And then with a very clear pathway come through the back of a number of these capital recycling transactions that we worked through to further deleverage the balance sheet as we move through into '26 with that sort of 5% to 15% range. We expect to be back in by the end of FY '26.

Okay. And then just on the timing of those conditions precedent, do you expect these to be fairly elementary or are there some issues that you need to work through and it could take sort of a bit of time to close this transaction?

Well, James, on the [indiscernible] various CPs across the different projects that we've got on foot that relate around things like planning and entitlement, which are things in the ordinary course of actually progressing all these projects, we would anticipate these CPs to be satisfied in the FY '26 financial year.

Okay. So it's not -- okay, so that might take a bit of time across FY '26 is what you're saying?

Yes.

Your next question comes from David Pobucky from Macquarie Group.

Just one follow-up. It's unrelated to today's announcement. I just wanted to see if there was an update on the $100 million of value at risk that related to the land parcels that were excluded from the Communities transaction?

The announcement we made a couple of weeks ago, just to make sure we're clear...

There's no update on what we previously sort of put out.

Your next question comes from Ben Brayshaw from Barrenjoey.

I just had a question on the investment mandate for Aurora Place. I was wondering if you could just comment as to whether Lendlease would look to invest in the asset with NPS either through a managed fund or even directly on balance sheet?

We haven't put any equity into that from a Lendlease standpoint, and the agreement will run for a circa of that 5-year period.

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

Firstly, thank you for all joining. From my perspective today, it's great to be able to announce the signing of this transformative new joint venture on a 50-50 basis with Crown Estates. Just to recap, it is a 50-50 joint venture for the master development. So that's one thing to note. We are and have not made any commitments on vertical development. It is just optionality for both ourselves as Lendlease and our partner, Crown, for their participation. If we either want to participate from a Lendlease standpoint, we have given ourselves the opportunity and optionality to participate at a minimum 10% equity investment and Crown can participate up to the 50% investment if they would like to proceed. Meaning, Crown Estates, as we've called out, is a great and ideal partner. And I think it's been able to recycle this $300 million of capital compared to where we were 12 months ago. I think it's a great outcome for our security holders. So thank you for those participating and joining us today. And if you do have any further questions, please do reach out to our investment IR team. Thank you.

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