Australia | Aug 08 2018
The next phase of growth is being revealed at Lend Lease as increasing amounts of capital is being allocated to development.
-Benefits of a vertically integrated business becoming clearer
-Tailwinds in urbanisation pipeline as well as FUM platform
-Construction business not as smart but still expected to grow substantially
By Eva Brocklehurst
Lend Lease ((LLC)) is looking like a winner for several brokers, as it transforms into an integrated global real asset developer and manager. The company's track record is helping to underpin its competitive advantage, as the next phase of growth materialises.
Goldman Sachs has emerged more confident after reviewing its investment thesis for Lend Lease, believing the driver of earnings growth for the next five years will be the amount of capital deployed to development and the rate of return generated on that capital.
The benefits of the vertically integrated business have become clearer to Morgan Stanley, too, as the company has successfully delivered over $16bn in projects over the past five years. This has accelerated product origination and development while using less capital per project.
From December 2017 to June 2023 Goldman Sachs expects Lend Lease to allocate an additional $3.6bn of capital to development. This should reflect capital required for medium-term opportunities, the residual cornerstone investment stakes in funds under management (FUM), and an incremental investment in the US telecommunications towers.
Morgan Stanley agrees the US telco business could be a key catalyst. Ongoing execution, in the broker's view, should mean a step-change in completions and income diversity that results in lower risk, lower gearing and improved returns.
The $750m cash injection delivered by the restructuring and partial sell-down of the retirement business over the first half of FY18 reduced gearing to just 1.9%. Goldman Sachs expects gearing to peak at 12% over the medium term, at the lower end of the company's 10-20% target range, as capital is deployed towards the rolling out of of the urban renewal and associated cornerstone investment stakes.
The company's secured urbanisation development pipeline stands at $57bn, with 73% secured via land management or phased drawdown agreements. For the balance, Goldman Sachs calculates land prices were set, on average, in FY13, with Barangaroo as early as FY09, providing a significant buffer against any future adverse market movements.
Rising rates could reduce near term margins, but Morgan Stanley agrees capital efficient structures have tended to lock in sale prices relatively early. Rising interest rates could also drive medium-term demand, as capital partners move up the development risk curve to offset potential market risk.
The broker envisages tailwinds provided by the urbanisation pipeline as well as the broadening FUM platform, with growth in the past five years of development driving 16% growth in FUM.
The funds management business has high-quality predictable earnings, although Goldman Sachs expects the contribution to operating earnings (EBITDA) from management fees to remain at around the current 9-10% level.