Investors ‘taking longer' as rates rise, Lendlease warns
Lendlease has warned that higher interest rates and inflation are slowing investment decisions, delaying the completion of developments and slowing the award of construction projects in the US and UK markets, and would dampen earnings growth in the current year.
Return on invested capital for its growing investments arm would come in at the lower end of its 6 to 7.5 per cent range this year, development ROIC would also be at the lower end of its 4 to 6 per cent range and construction EBITDA earnings would come in at the lower end of its 1.5 to 2.5 per cent range, Lendlease chief executive Tony Lombardo said.
The warnings came during a strategy update in which Lendlease said it will reduce capital spent on development and boost the capital it puts into its investment arm to increase the contribution of its funds management arm to the profitability of the $5.9 billion company.
“People and investors are just taking longer with inflation and interest rates,” Mr Lombardo said on Thursday.
“Where we thought we were moving forward, the funds growth is going to be a bit of a slower growth rate this year.”
Higher cap rates, or yields, which reflected rising funding costs were also slowing some projects, he said.
“On the development front, people are taking longer and transactions are taking a bit longer to complete and cap rates are pushing up,” Mr Lombardo said.
“On the construction front, we are seeing -and I flagged this – that in the US and UK we are still having to secure a significant amount of work this year and that’s probably coming through a lot slower.”
The short-to-medium term headwinds, which Mr Lombardo said were likely to last over the next 12 to 18 months, add to the challenges of a turnaround process he implemented after taking over the underperforming company last year.
Lendlease shares dropped after the announcement, trading 55¢, or 6.4 per cent, lower at $8.04.
The strategy Mr Lombardo and chief financial officer Simon Dixon laid out on Thursday forecasts a material shift in capital allocation from developments to investments, with the balance of capital – based on the range of allocations – rising from 40 per cent to 60 per cent in investment and falling from 60 per cent to 40 per cent in development.
Lendlease also said under the strategy it hoped to have implemented by FY2026, its reliance on EBITDA earnings from investments would rise from the current 35 to 45 per cent range to 40 to 50 per cent, putting it on par with development earnings, while construction earnings would shrink from the current 10 to 20 per cent range to about 10 per cent.
The group return on equity target range of 8 to 11 per cent will narrow to an 8 to 10 per cent range, due to the change in capital allocation, Mr Dixon said.
Investors are also likely to receive less. Lendlease reduced its distribution payout ratio from 40 to 60 per cent of core operating profit to 30 to 50 per cent and while distributions would be determined each period by the board, in the “nearer term” they were likely to be at the lower end of the new range as the company retained funds to focus on growth, he said.
By 2026, the company aims to have $70 billion worth of funds under management, up from the current $44.4 billion worth, to be completing more than $8 billion in developments and to maintain a construction backlog – the total of revenue to be earned across future periods – of $10 billion.
Mr Lombardo also said he expected the company would develop build-to-rent housing – which it has not yet started in Australia – at its Melbourne Quarter project in the Victorian capital and in Brisbane.
