Edited Transcript of LLC.AX earnings conference call or presentation 19-Feb-20 11:00pm GMT – Yahoo Finance

Half Year 2020 LendLease Group Earnings Presentation

Millers Point, New South Wales Feb 23, 2020 (Thomson StreetEvents) -- Edited Transcript of LendLease Group earnings conference call or presentation Wednesday, February 19, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen B. McCann

Lendlease Group - Group CEO, MD & Executive Director

* Tarun D. Gupta

Lendlease Group - Group CFO

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Conference Call Participants

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* Benjamin J. Brayshaw

JP Morgan Chase & Co, Research Division - Analyst

* James Druce

CLSA Limited, Research Division - Research Analyst

* Sameer Chopra

BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research

* Sholto Maconochie

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

* Stuart McLean

Macquarie Research - Research Analyst

* Tom Bodor

UBS Investment Bank, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Lendlease 2020 Half Year Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. Steve McCann. Thank you. Please go ahead.

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Executive Director [2]

Story continues

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Good morning, and welcome to the Lendlease 2020 Half Year Results Presentation.

My name is Steve McCann, Group Chief Executive Officer and Managing Director of Lendlease. 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 in the room is Tarun Gupta, Group Chief Financial Officer.

Firstly, I'll provide an overview of Lendlease's results for the period ended December 31, 2019. I'll then hand over to Tarun, who will talk through the financial results before I provide an update on our operations and outlook. We'll then be available to take questions.

As always, our first and most important priority is health and safety. Every day, tens of thousands of people around the world come to a Lendlease place to work. As our business grows, so do the number of workers in our care. Our commitment to their health and safety and everyone who interacts with us is our highest priority. Tragically, in September 2019, a construction worker was seriously injured in a critical incident on a project in Kuala Lumpur where Lendlease is the construction manager. While recovering from the surgery in hospital, the man contracted an infection and subsequently passed away in October. On behalf of all at Lendlease, I extend my heartfelt condolences to his family, friends and colleagues. This is a powerful reminder of the need to keep safety at the forefront, and we'll continue to maintain a relentless focus on safety leadership throughout the organization.

Notwithstanding this tragedy, the strive for continuous improvement across our business and recent enhancements to our analytics and assurance practices has supported an improved safety performance in HY '20. The frequency rate for lost time injuries was 1.3, and the percentage of operations without critical incidents was 94%.

Moving now to Slide 5. Lendlease's core strategy is focused on urbanization in gateway cities, and we aim to be the global urbanization partner of choice. Our ability to deliver major urbanization projects through our integrated model, together with our financial strength and strong track record, provide a point of difference we believe few can match. We apply a disciplined commercial approach informed by the 6 key trends which drive our business model. This helps us create great places, which make a positive contribution in meeting the world's significant urbanization needs. Our long-term value is underpinned by 5 focus areas that drive our approach to create safe, sustainable and profitable outcomes for our people, customers, partners and securityholders.

Turning now to ESG on Slide 6. The group has a proud history of leadership in sustainability, which has been critical to our success in securing urbanization projects and creating great places. During the period, the group published 4 climate scenarios in line with the Task Force for Climate-related Financial Disclosure or TCFD recommendations and is the only company in the real estate sector participating in the TCFD Secretariat's advisory group for scenario planning.

We are committed to creating strategic resilience across the business. The extreme bush fire season in Australia, together with recent severe storms in a number of regions, point to more volatile weather conditions globally. These events and the impacts of climate change strengthen our resolve to address the climate impacts of our business with greater focus and direct action. To this end, our Australian construction business achieved net 0 carbon in FY '19. We also have commitments in place for assets representing more than $12 billion in gross asset value to operate at a net 0 carbon basis by 2025.

In December, our business sign up was the first real estate company to become a member of the responsible steel initiative, which aims to drive low to 0 carbon steel solutions for our supply chain. More than a decade ago, Lendlease bid for Barangaroo South with a bold vision to achieve carbon neutrality across the entire precinct. That vision was realized at the end of last year with the Commonwealth government certifying it as Australia's first carbon-neutral precinct. Through the Lendlease Foundation, we formed new partnerships with Red Cross, OzHarvest and Landcare, and renewed our long-term partnership with MATES in Construction. These shared value partnerships are focused on creating measurable socioeconomic value by addressing social issues and the needs of the communities that we operate in, whilst aligning with our sustainability objectives.

In the 2019 Global Real Estate Sustainability Benchmark, APPF Commercial was the highest-ranked property fund. It has achieved that ranking in 5 of the last 6 years. Four of our managed funds ranked in the top 10 globally, including APPF Retail, which was named sector leader across all listed and unlisted retail funds.

To further support the management team as we deliver our extensive global development pipeline, 2 nonexecutive directors were appointed. These new appointments will bring further international property investment, development and construction expertise to the Board and provide valuable perspective with their domicile in the U.K. and the U.S.

Turning to Slide 7. The noncore segment that comprises the Engineering and Services businesses has been reported as a discontinued operation in HY '20. The sale of our Engineering business to Acciona for $180 million was agreed in December 2019. The transaction, which is subject to conditions, is expected to complete in the first half of this calendar year. Acciona will acquire the business, excluding the NorthConnex and Kingsford Smith Drive projects, which will be completed by Lendlease. Both projects are more than 90% complete and are expected to finish this calendar year.

The Melbourne Metro Tunnel project is currently being retained by Lendlease. We have previously outlined there have been issues in relation to the scope and costs on the project. The consortium continues to work with government on a confidential basis to resolve these issues while delivering the project to achieve the government's completion dates.

The loss on exiting the Engineering business will reflect a combination of exit-related costs and proceeds from sale relative to the carrying value of the business on completion of the transaction. The sale process for the Services business continues, notwithstanding the withdrawal of a party with whom we had been in advanced negotiations. We have subsequently reengaged with other potential acquirers, although that process is in a preliminary stage. In effecting the sale, we will look to realize the best possible outcome for our employees, customers and securityholders.

Total estimated cost of $450 million to $550 million to exit the Engineering and Services businesses remain appropriate. Tarun will provide more detail on the composition of these costs.

Turning briefly to the performance of the noncore segment, which recorded EBITDA of $23 million, inclusive of $7 million of exit costs. Engineering was breakeven with a gross profit offset by overheads, and to a much lesser extent, the exit costs. Both the Melbourne Metro and WestConnex tunnel projects reached 20% complete towards the end of the half. New work secured, included the bulk earthworks contract at Western Sydney International Airport and additional works on the Southern Program Alliance in Victoria.

The services business delivered solid performance with an EBITDA margin of approximately 5%. New work secured of $1.1 billion included telecommunications contracts and a multiyear contract with Sydney Water.

Turning now to the group result on Slide 8. For HY '20, the group's core business generated profit after tax of $308 million and a return on equity of 9.6%. Group profit after tax was $313 million with earnings per stapled security of $0.555. The interim distribution of $0.30 per security represents a payout ratio of 54% within the 40% to 60% target range.

The cornerstone of the group's strategy is to create the best urban precincts in key global gateway cities. In this regard, substantial progress was made towards setting the group up to deliver on its strategy now and into the future. Two new major urbanization projects were added to the pipeline, generating significant growth. A development joint venture was formed with an existing capital partner on the Victoria Cross Over Station Development, and our flagship project in Singapore, Paya Lebar Quarter completed, exceeding both our financial and nonfinancial performance targets.

Development return on invested capital of 7.3% reflected activity across several urbanization projects. Development earnings are expected to be skewed to the second half of the financial year driven by commercial and residential activity across our urbanization pipeline. The core construction margin of 2.3% was generated on $4.3 billion of revenue. Our Construction business is highly regarded in each of our target markets and continues to generate stable returns.

In the U.S., we are consistently ranked as a leading high-rise residential builder, and in Australia, we were recently named the top infrastructure contractor by the Australian Department of Defense. The investments work of 10.7% reflected strong fee income including recognition of performance fees following the completion of Paya Lebar Quarter. Our investment platform continues to attract global capital, looking for access to our asset-creation capabilities and quality pipeline. The investments platform is well placed to continue to grow strongly and provide a solid base of recurring earnings for the group.

Turning to Slide 9. Our ability to deliver transformational urban precincts with a focus on environmental, social and financial outcomes is recognized globally. Continued origination success during the period has driven our urbanization pipeline to almost $100 billion within a total development pipeline of $112 billion. Two major residential-led urbanization projects with an estimated end-development value of more than $36 billion were secured, adding further long-term earnings visibility.

In London, the Thamesmead Waterfront development is expected to create 11,500 homes, in addition to new cultural community and commercial space. We have partnered with Google to develop 3 mixed-use communities in the San Francisco Bay area. The scheme is anticipated to deliver more than 15,000 new homes over a 10- to 15-year time frame. In Sydney, the first of 3 residential towers at One Sydney Harbor Barangaroo was launched to high demand. The project currently has more than $1.4 billion in presales, with the Penthouse setting an Australian record sale price. In Chicago, 2 buildings at Lakeshore East comprising apartments for sale and rent were put into delivery in partnership with our capital partner. Several third-party capital initiatives were progressed. A development joint venture was formed to deliver the 58,000 square meter Victoria Cross Over Station Development, contributing to half year profit.

The listing of the Lendlease Global Commercial REIT in Singapore demonstrates the support for the group's global Fund and asset management expertise. The retail and residential components of Singapore's newest lifestyle precinct Paya Lebar Quarter completed. This marks the culmination of a 4-year development joint venture with our capital partner which has delivered approximately $4 billion of product, including 3 office towers, a retail mall and more than 400 apartments. These initiatives continue to demonstrate the strength and attractiveness of our development pipeline and integrated business model.

Turning now to Slide 10. Our commitment to our core urbanization strategy is unwavering. Since FY '14, our urbanization pipeline has quadrupled from $25 billion to almost $100 billion, with 21 major urbanization projects in delivery. The endorsement of our capability is highlighted by the success and vibrancy of our completed projects such as Paya Lebar Quarter in Singapore and Darling Square in Sydney, where we have created world-class destinations for people to live, work and visit. While Barangaroo South is not expected to fully complete until FY '26, it is already being heralded as a global benchmark in urban regeneration.

In recent years, our development activity has averaged $4 billion per annum. Given the significant growth in the pipeline, we are well placed to accelerate the rate of production materially over the medium term. We have continued to implement what we call our new ways of working, to take the best of what we currently do to enable the group to deliver at a much greater scale. We are already seeing tangible results, most notably in our global residential practice.

Our investment in internal capability is designed to support the safe, sustainable and profitable delivery of our growing pipeline. We aim to come back to the market mid this year with more detail on our revised delivery targets.

More than $50 billion of institutional-grade investment product is expected to be created from the secured pipeline. This comprises approximately $30 billion of commercial assets or more than 50 buildings, and approximately $20 billion of residential for-rent assets or more than 19,000 apartment units. This will provide our capital partners with access to a broader range of high-quality investment assets, in addition to greater opportunities to participate alongside us in development activities.

Since FY '14, funds under management has more than doubled from $16 billion to $37 billion, and the group is well placed to double funds under management again as the urbanization pipeline is delivered.

I'll now hand over to Tarun.

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Tarun D. Gupta, Lendlease Group - Group CFO [3]

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Thanks, Steve, and good morning, everyone. Turning to our financial performance for half year '20 on Slide 12.

Core operating EBITDA was down 3% to $628 million. Development EBITDA rose by 4%. The final development profit on Paya Lebar Quarter was recognized following completion of the retail mall and apartments. There was a $31 million gain on sale on the establishment of the Victoria Cross Commercial Trust that will deliver the Victoria Cross Over Station Development. In addition, there was a valuation uplift of $92 million for the group's remaining 75% interest in the joint venture.

There were 1,146 apartment settlements and completions in the period. Solid margins were generated on the residential for-sale apartments at Clippership Wharf in Boston, Elephant Park in London and Collins Wharf in Melbourne. Profit on approximately 700 of these apartments was largely booked in prior periods. These relate to apartments at Paya Lebar Quarter and residential for-rent apartments at Clippership Wharf.

The default rate on apartments for sale was below 1%. The Australian master plan communities portfolio had a subdued period with settlements of 836 lots, impacted by market conditions and production and planning delays on key projects.

The Construction segment EBIT delivered EBITDA of $101 million, down 9%, with the EBITDA margin up from 2.1% to 2.3%. The 17% decline in revenue was partially driven by activity on integrated projects being recognized in the Construction segment in the prior corresponding period.

Both revenue and earnings derived from the construction of buildings on integrated projects were reported in the Development segment from second half FY '19. This approach was adopted to more accurately reflect the returns the group generates from its urbanization projects through the integrated model. Comparisons with the prior corresponding period are, therefore, impacted by this change.

Investments EBITDA of $255 million was down 7%. Strong operating earnings from the Investments platform were more than offset by lower ownership earnings on the back of reduced co-investment revaluations and retirement living earnings.

The adoption of the new leasing accounting standard, AASB 16, triggered a reclassification of operating lease expenses to finance costs and depreciation. This change resulted in lower operating costs and higher depreciation and finance costs. On a like-for-like basis, group services costs was 6% higher based on investment in productivity and efficiency initiatives. Higher average net debt was also a contributor to the rise in net finance costs.

Moving now to Slide 13. The chart provides an overview of the major movements in net cash flows during the period and a longer-term view on historic cash conversion. We commenced the year with $1.3 billion in cash. Underlying operating cash flow was $29 million, with the impact of maturing places instruments and timing of receipts across the Development and Investment segments, key drivers of cash flow for the half. Underlying investing cash flows of $503 million reflect the group's ongoing deployment of capital into the development pipeline and contributions into the investment platform, including the establishment of the Lendlease Global Commercial REIT. Net financing inflows of $425 million reflected the drawdown of existing facilities.

We closed the period with a cash balance of $1.1 billion. Cash flow coverage, that is underlying operating cash flow to EBITDA, has averaged 84% since FY '16. That level is broadly in line with where we expected to trend over the medium to long term. Over shorter periods, there will be some variability, as was the case in half year '20.

While the cash flow coverage was only 5%, the key driver of this was the maturing of the PLLACes product in the period. The product results in the sell-down of presold apartment revenue ahead of completion, with the PLLACes investors receiving the cash on settlement. This is a risk-mitigation tool which provides protection in the event of significant apartment defaults. In half year '20, $220 million of PLLACes product matured. The group currently has no outstanding PLLACes instruments.

In addition, the mismatch of profit recognition from timing of cash flow receipts was larger than usual in the period. For example, the cash payment on the Paya Lebar Quarter performance fee that was booked in the first half was received post balance date.

Looking now at the group's financial position on Slide 14. The group remains in a strong financial position with gearing at the midpoint of the 10% to 20% target range. The key drivers of the rise in gearing from June 2019 were the net cash generation I discussed and the $800 million increase in invested capital across the Development and Investment segments. The interest cover ratio was 7.4x. Net debt ended the period at $2.3 billion, up from $1.4 billion at FY '19 and in line with the prior corresponding period. The average cost of debt declined to 3.6% during the period. While average debt maturity is 3.9 years, with no material debt expiries until FY '22.

The group's liquidity position is $3.1 billion, which includes the group's share of cash from joint operations of $700 million which is reported in the balance sheet as assets held for sale.

In terms of where we see the financial position of the group at 30 of June 2020. Gearing is forecast to be in the range of 15% to 20%. This assumes the completion of the sale of the Engineering business in the second half. The anticipated cash flow impact of the sale remains in line with the estimates at the time the agreement was announced. 1/3 of the sale price, being $60 million, less transaction costs, is scheduled to be received on settlement. A negative working capital balance, backed by cash, will be transferred with the business. As at 31 December, that amount was approximately $425 million for the projects included in the sale agreement. The actual amount of working capital may vary at settlement.

For context, had the completion of the sale occurred in FY -- half year '20, gearing would have been approximately 3% higher. The remaining proceeds from the sale are due in FY '21, with the cash flow impact of the remaining exit costs relating to engineering expected to be incurred over several years. Exit costs relating to services will be dependent on the timing of the sale of that business.

The previously disclosed cost estimate to exit the noncore segment of $450 million to $550 million pretax remains appropriate, with $22 million expensed to date. Exit-related costs include implementation and selling costs, indemnities included in any sale agreement and potential cost to cover concluding projects retained by the group. This cost estimate, together with existing provisions, is considered appropriate to cover concluding retained projects and to exit the noncore segment. We remain committed to maintaining an investment-grade credit rating and the capacity to absorb and respond to market volatility.

Turning now to our core business performance for the period against the portfolio of management framework targets on Slide 15. In terms of EBITDA mix, all 3 segments were within their target ranges. The segment invested capital mix continues to be weighted towards development, reflecting the significant amount of development activity that is underway.

The continued implementation of our international gateway city strategy resulted in a reduction in the proportion of capital allocated to Australia in recent years. Returns across each of the segments was solid. Development returns were below the target range reflecting an expected skew to the second half. There was also a second half skew in FY '19. The construction margin was within the target range, and the Investment segment was at the top of the target range.

Looking now at Slide 16. As an organization, we are focused on delivering consistent returns over the longer term for our securityholders. This chart illustrates the performance of the core business over the last 5 financial years, including returns to date in the current year. Both the Development and Construction segment returns have been at the midpoint of their respective target ranges over this time, while the Investment segment outperforming. This has enabled the group to achieve a core business return on equity towards the upper end of the target range. We believe the foundations are in place for the core business to continue to perform strongly.

I will now hand back to Steve for an operational update.

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Stephen B. McCann, Lendlease Group - Group CEO, MD & Executive Director [4]

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Thanks, Tarun.

Turning to Slide 18. A very disciplined and focused strategy of targeting key gateway cities has resulted in strong growth across the platform and provides the group with the opportunity to extend the leadership position in what we term as creating place in urban precincts. Today, we operate in 15 gateway cities, and of those, our 21 major urbanization projects are located in 9. We've secured a great pipeline and are working hard on enhancing our operating structure for success across a scale platform. Our development pipeline, the front end of the integrated model, is the key for the future growth of construction on integrated projects and the Investment segment.

Moving to the development segment on Slide 19 and focusing on apartments. As I've just noted, the pivot towards international urbanization projects in recent years is producing results, particularly as these projects move into delivery. It has also provided diversity by product with our entry into the residential for rent sector. Apartment settlements and completions were recorded across several gateway cities, primarily outside of Australia. Delivery commenced on One Sydney Harbor Barangaroo, and given the scale of the development, we're exploring potential joint venture opportunities. At Lakeshore East in Chicago, apartments for sale and rent were also put into production. The 2 new major urbanization projects secured in HY '20 are both residential-led and have contributed more than 26,000 units to the now 57,000-unit pipeline. Approximately 1/3 of these are expected to be residential for rent units.

Turning to our commercial performance on Slide 20. As I noted earlier, a development joint venture was formed to deliver the Victoria Cross Over Station Development in Sydney. The transaction with the Lendlease-managed APPF Commercial demonstrates the value of the integrated model, where our asset-creation capabilities provide our capital partners with access to high-quality investment product. Three commercial buildings were completed during the period across 3 major urbanization projects. The retail mall of Paya Lebar Quarter in Singapore is 90% let and performing well. It has a strong anchor mix with fair price finest, Kopitiam and UNIQLO. The third commercial building at International Quarter London and the final commercial building, Daramu House at Barangaroo, South in Sydney were also completed. There are a further 5 major commercial buildings in delivery with an estimated end value of $5.4 billion.

Potential conversion opportunities looking out to FY '22 are promising, with 18 buildings or 523,000 square meters in various stages of planning. Within that, nearer-term opportunities include 2 office buildings at Milano Santa Giulia, a fourth building at International Quarter London, and buildings at Melbourne Quarter and Brisbane Showgrounds.

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Edited Transcript of LLC.AX earnings conference call or presentation 19-Feb-20 11:00pm GMT - Yahoo Finance