Lend Lease remains in a strong financial position with cash reserves as at 31 October 2008 of over A$800 million (June 08: A$843 million) and low gearing (net debt to total tangible assets less cash) of 7% (June 08: 4%).
Management is continuing its strong focus on cash flow management and maintenance of significant liquidity.
Group CEO, Greg Clarke, said: “We believe it is critical that we continue to position the Company to remain in a strong financial position. Unprecedented financial market conditions make it prudent to take pro-active steps to adjust our balance sheet and investment outlook so we are in a good position to explore opportunities as markets recover.
“We have been very prudent in the management and use of our cash and will remain cautious about new investment opportunities. We aim to come out of this down cycle in a strong financial and operating position,” he said.
Net Operating Profit After Tax
In August 2008 Lend Lease advised the market that it expected Net Operating Profit after tax for FY09 to be approximately 10% to 15% below 2008 financial year Net Operating Profit after tax of A$447.1 million. At the operating level, Lend Lease is broadly in line to meet this guidance.
Part of this guidance included a contribution from the recycling of capital, which was expected to contribute between 20% to 25% of the Group’s Net Operating Profit after tax.
Lend Lease has conducted a process to determine market interest in certain non-core assets, including its 50% interest in the King of Prussia (“KoP”) shopping mall in the US. This process is now complete and management has reached the view that an appropriate sale price is unlikely to be achieved for this asset in the current environment.
As previously advised, Lend Lease is not a forced seller of assets, and will not sell assets at sub-optimal values to meet profit targets. Accordingly, Lend Lease has withdrawn KoP from sale until an appropriate sale price can be realised.
Lend Lease is in negotiation on a number of other potential transactions which, if successfully completed, will enable it to meet its earlier guidance. Lend Lease will keep the market informed as appropriate
Adjustment to Lend Lease Asset Values
Since the announcement of Lend Lease’s annual results in August 2008, financial market conditions have deteriorated significantly. Of the property markets where Lend Lease operates, the UK has been the most impacted.
With this deterioration it is expected that when property valuations are obtained at the half and full year periods, expansion of capitalisation rates will lead to a decrease in the balance sheet carrying value of Lend Lease properties.
To act prudently, the Lend Lease Board and management are implementing a number of measures to ensure the Company’s financial position is maintained during what is expected to be a period of uncertainty. These measures are non-operating charges and primarily non-cash that, while excluded from Operating Profit, are expected to impact the Group’s FY09 Statutory Profit.
The measures are detailed below.
There has been an expansion in capitalisation rates in all property markets, affecting Lend Lease most significantly in the UK. This is expected to result in a reduction in Statutory Profit of up to A$170 million after tax. The final amount of the reduction will be dependent on independent valuations of Lend Lease’s investment assets, which will be updated both at 31 December 2008 and 30 June 2009;
As the UK residential market has continued to deteriorate, we have reviewed the carrying value of both goodwill and inventory related to the Communities business. Following this review, a combined total write-down of approximately A$272 million after tax (goodwill write off A$172 million and further inventory write down of A$100 million) will be taken;
A reduction in the carrying value of the Group’s 4.3% interest in the FKP Property Group (“FKP”). This interest was acquired at an average price of A$4.32 per share. Lend Lease will be required to mark this interest to market at 31 December 2008. Based on FKP’s current share price of A$1.15, this will result in a reduction in Statutory Profit of A$30 million after tax.
The Board and management of Lend Lease have been pro-actively managing the business to steer the Group through the current difficult market conditions, to preserve our solid cash generation ability and to position it strongly as the markets recover. Some initiatives undertaken include:
In response to slowing market conditions a number of cost saving initiatives have been implemented which, based on what has been identified to date, will result in one-off costs in the order of A$50 million after tax.These steps are designed to resize overhead in light of deteriorating market conditions and will continue to be the subject of ongoing review;
The closure of the UK Defined Benefit Pension Plan to new entrants with an associated actuarial gain of A$31 million after tax;
Optimising the value of our strong development pipeline through rescheduling and reprioritising projects in line with market conditions
The combination of the above items, which are non-operating and primarily of a non-cash nature, will impact Lend Lease’s FY09 Statutory Profit after tax by approximately A$490 million. Given these charges are primarily non-cash in nature, they will have no impact on dividend policy, which will be determined by the Board in the ordinary course in February 2009.
The valuation of Bluewater shopping centre in the UK will also be impacted. This will not be included in the Lend Lease profit and loss account or balance sheet as Lend Lease’s interest in this asset is carried at cost (June 08: £250m).
Group CEO, Greg Clarke, said: “Lend Lease has built a solid long-term platform of development projects across many geographies and sectors. While it is disappointing property markets are feeling the fall-out from deteriorating financial conditions, we have great market positions combined with the capability to be well placed as markets recover,” he said.