We added Lend Lease to our core portfolio recently due to attractive valuation and income.
Background: Lend Lease is a end to end global real estate construction and development company with a focus across Residential and Commercial Sectors. As of June 30 2015 it has presence in 12 countries with a development pipeline with an end value worth more than $44.9 billion and construction backlog of $17.3 billion.
LLC also have a funds management business with $21.3 billion where the development business provides a pipeline of core commercial assets which it can continue to earn management fees from.
Lend Lease has been under performing the broader market in the last 6 month due to investor concerns on the Australian residential market. Pre-selling or selling the residential lots off the plan before construction commencement is a crucial component of residential development process in Australia. It is expected to settle on more than 4500 lots in FY 16 (split between 1000 apartments and 3500 communities)
The primary driver of the increase cautiousness on LLC is driven by regulatory speed limit on investment lending and stricter lending standards by the Australian Banks. This could create issues on settlement of pre sales of Lend Lease residential projects as they complete from FY16 – FY18.
From a pricing point of view these value are locked in where the risk remaining are execution and settlement of the properties. LLC provided color of the residential exposure in the most recent investor day.
- It has $5.2 billion residential exposure in the next 3 – 4 years across product and geographies.
- Minimum 10% deposit across all products (some commentary where it has increased to 20% on some products going forward)
- Low historical default rate (although we have not had a major slow down in the last 20 years).
- Embedded price growth and favorable FX movement for foreign buyers. (we agree some investors are sitting on capital gains on projects that were launched in the last 2 years. FX gains are once off where the low Australian Dollar is a one off gain for existing buyers. The continual weakness of AUD does provide some attractive on a relative basis however)
We are more constructive on the Australian residential exposure of LLC given the overall context of the business include a larger commercial development, global infrastructure construction and funds management business. (Examples of Commercial pipeline includes the Lend Lease Barangaroo project in Sydney.)
Estimated earning consensus for LLC in FY16 is 1.20 and 1.30 in FY17. Given where the current price, Lend Lease is trading at 11x forward P/E 16 earnings and 10x 17 earnings. Coupled with a decent dividend yield, we are comfortable that we are rewarded to take the risks the market is pricing in.
Lend Lease Dividend History