Lend Lease Corporation Limited (“Lend Lease”, “The Group”) delivered a strong profit in the six months ended December 2007 as the scale and diversity of the Group’s operations provided resilience in the face of economic and market uncertainty.
Statutory profit after tax at A$259.6 million was 49% higher than for the prior half year period. The corresponding half year period was suppressed by a large UK construction provision, but included the one-off interest of A$32.2 million after tax from the Australian Taxation Office (“ATO”), following favourable resolution of a long-running tax dispute. Statutory profit after tax includes a net revaluation loss in property investments of A$3.2 million compared to an A$11.2 million after tax net revaluation gain at December 2006.
Managing Director & Chief Executive Officer Greg Clarke, said Lend Lease, like most other companies, faced increasing headwinds from the slowing US economy, tightened credit markets and softer property markets in the UK; however, the Group is well placed to continue to deliver ongoing earnings growth.
“Our balance sheet strength gives us good flexibility and access to capital to fund our development pipeline, while the diversity and sector focus of our operating businesses mean we are well placed to deal with market volatility,” Mr Clarke said.
“The Actus pipeline and earnings are driven by committed government programs, as are the UK PPP projects. In the short to medium term our business plan does not include earnings from the still fledgling Communities operations in the US. Similarly, while the UK Retail & Communities operations will be impacted by softer market conditions, we see mitigating upside in the Asia Pacific region, with further strength in Bovis, where contracted Backlog Gross Profit Margin is at record levels.
“As a result, we expect to continue to deliver competitive growth in full year net operating earnings. We have previously flagged to the market that our operating earnings would include some major asset sales such as Bluewater and King of Prussia shopping centres. However, we are in the fortunate position of not being a forced seller of assets and, with current markets lacking transactional liquidity, we may decide to defer any such sales in the short term.
“For full year 2008, even without a major asset sale, we are expecting to come in slightly under our target annual average EPS growth of 10% p.a. over a five-year period.
“Given our strong performance over the past three years, our expectations for the full year result mean we remain well ahead of our five-year objective. In the current market circumstances, we think that is both a competitive and compelling position to be in,” Mr Clarke said.
The Group remains well positioned with a very strong balance sheet and conservative debt profile. At December 2007, Lend Lease had approximately A$1.0 billion in undrawn facilities, and a further A$1.1 billion in cash and negotiable instruments. Gross borrowings including other financial liabilities remained conservative at 15.1% of Total Tangible Assets. At 31 December 2007 the mix of borrowings, including the Bluewater lease, was 84% at fixed rates. The average maturity of Lend Lease’s drawn debt, excluding the Bluewater lease, was 11.5 years with fixed rates averaging approximately 6% p.a.
The strong increase in operating earnings enabled Directors to declare an interim dividend of 43 cents per share, a 23% increase on the corresponding prior period. The dividend is 40% franked and represents a 66% payout ratio on operating profit after tax.
Mr Clarke said the Group had performed well in the face of tough conditions and was in a strong financial position to fund its growing development pipeline as well as look at new growth opportunities.
“This is a strong result that reinforces the robustness of our business model and earnings diversity. Financial conservatism is protecting us from the worst of the volatility we are now seeing around the world, particularly in the property sector,” Mr Clarke said.
“Actus Lend Lease in the US turned in a very good result, as did the Investment Management business. We are clearly making good progress in returning Bovis Lend Lease to earnings growth, which was one of the key undertakings we gave to the market this time last year. Both the Retail and Communities businesses delivered solid performances, especially in Australia and Singapore.
“We continued to recycle capital during the half, taking profits and reinvesting in the Group’s already substantial development pipeline. The Group’s financial strength and track record have enabled it to continue to see excellent deal flow and to execute when the right opportunities come along,” Mr Clarke said.
REVIEW OF OPERATIONS:
Actus Lend Lease, Bovis Lend Lease’s Australian operations, and the Investment Management business delivered strong contributions to the Group result.
Bovis Lend Lease in Asia Pacific had a significant increase in profit, reflecting strong market conditions and successful completion of a number of projects in Australia. Bovis Lend Lease operations in Europe returned to profit following the construction provision taken in December 2006. In the US, a good underlying performance was masked by an increase in costs associated with a fire at the highly complex Deutsche Bank building demolition at Ground Zero in New York and the impact of the strong Australian dollar.
The Asia Pacific Communities operation delivered a significant increase in the number of units settled, up 49% relative to the December 2006 half year, despite the continuing tough residential market conditions in New South Wales. Total Retail & Communities was slightly lower than the comparable period, primarily due to the impact of exchange rates and continued investment in and resourcing of the UK development pipeline.
Crosby Lend Lease’s earnings in the UK were down slightly on the prior period and are expected to be significantly softer in the second half. This is expected to be offset by an improvement in the Asia Pacific Communities business.
Lend Lease maintained its characteristically strong financial position in the six months to December 2007, with its investment grade credit rating unchanged.
Gross borrowings, including other financial liabilities, to tangible assets were 15.1% at December 2007. Interest cover was 8.4 times at December 2007, above the Group’s target minimum of 6 times.
Liquidity at December 2007 was strong, with undrawn committed bank credit and overdraft facilities of A$952.7 million. In addition, the Group had cash and cash equivalents of A$727.4 million and negotiable instruments with a maturity of greater than three months of A$359.8 million.
Group Finance Director, Steve McCann, said: “We are not at risk with any short term debt maturities and remain comfortable with our funding strategy for the Group’s committed development pipeline irrespective of the tightened credit market conditions.
“Our strong financial position means we have the flexibility to pursue appropriate acquisition and investment opportunities that might emerge in the short to medium term, but we will continue to be patient and cautious,” Mr McCann said.