Lend Lease October 2003 Greg Clarke Group CEO - Media Corporate IR Net
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Lend Lease
October 2003
Greg Clarke
Group CEO
1
• I joined Lend Lease as CEO almost a year ago and it has been an eventful
journey since.
• We’ve taken some big and painful decisions; and we have dramatically
reshaped the company and its future.
• Lend Lease is a different company today and I am very pleased about how
well we are placed for the future.
• Importantly, we are in a very strong financial position, which provides
many options for us.
• For example, we can take advantage of any acquisition opportunities that
may be presented.
• Alternatively, we can return more capital to shareholders.
• What I want to do today is focus on our strategy, which we believe will
generate sustainable earnings growth for our shareholders.
Lend Lease Group
¾ Real estate services business
¾ Operates in over 40 countries
¾ Market capitalisation approx. A$4.3 billion
¾ Investment grade credit rating
¾ Company reinvigorated
2
• But first, a quick snapshot of the Group.
• The simplest description of Lend Lease is a real estate services business
providing value to clients both locally and globally.
• Our three core markets are Australia, the UK and the US; however, we
also operate in almost 40 other countries.
• This geographic capacity allows us to deliver services to our global clients
effectively and provides us with distinct competitive advantages.
• In addition, our investment grade credit rating provides the advantage of
being able to access major longer term projects that many of our
competitors are not able to.
• Our market capitalisation is approximately A$4.3 billion and, importantly
for you, we are a company that is being reinvigorated.
• I am focusing on providing the skills to management necessary to take
Lend Lease forward on a growth trajectory.
• The management team is on board, and there is a growing acceptance
within the company that we are going to be successful.
Lend Lease Business Mix
Asia Pacific UK/Europe US
FUNDS Investment Clients
(GPT/APPF/APIC/REP)
MANAGEMENT
Retail sector Retail
Retail (Lend Lease Retail Partnership)
MAJOR GROWTH INITIATIVES
INTEGRATED DEVELOPMENT
TO BE IMPLEMENTED
Urban Regeneration
Mixed use Delfin Lend Lease
(emerging)
communities
SERVICES
sector Inner Urban
Inner(emerging)
Urban (emerging)
Defence Defence Housing
Actus Lend Lease
sector (emerging)
Health care PFIs – Health
sector (emerging)
PROJECT & CONSTRUCTION
MANAGEMENT Global Markets and Clients
(BOVIS LEND LEASE)
3
• Lend Lease now has a simpler and more focused strategy.
• Our business mix allows us to pursue synergies globally with Bovis Lend Lease’s global clients
and markets.
• It provides us with an excellent multi-country platform for addressing selective business
opportunities in each region based on our skills and competitive strengths.
• In essence, we are leveraging the benefits of Bovis Lend Lease’s scale with a regional focus to
generate longer term, higher margin business.
• Australia has the most integrated model – from funds management to development services to
project management and construction through to asset management.
• We have a different approach in the US, where we are leveraging our skills in large scale, long
term US military privatisation projects.
• We tried funds management, but it did not work for us, so we are exiting that business in the US.
• It is different again in Europe where we are focusing on higher margin privatisation projects in
health care and defence.
• We are also establishing a presence in urban development in the UK.
• In a nutshell, our strategy is about leveraging our global scale with a regional focus to generate
consistent, higher margin and growing earnings.
• It is about focus on execution.
• To that end, I am driving a performance culture through the organisation that will deliver value to
our shareholders.
Bovis Lend Lease
¾ One of the world’s leading project and construction
management companies
¾ On track for 10%+ PAT growth in FY04
¾ Client relationships a key strength
AOL Time Warner Center BBC Portland Place Aurora Place
Columbus Circle, New York London Sydney
4
• Let’s now turn to the major profit drivers for the Group.
• Bovis Lend Lease is a strong, well performing business.
• One of the top 10 global project and construction management companies in the
world.
• It has enjoyed a 33% compound growth in profit after tax since 2000, and we
are on track for growth in excess of 10% this year.
• We will achieve this profit growth on the back of significant overhead
reductions, as the tough economic environment will make it very difficult to
achieve growth in the gross profit margin earned on contracts this year.
• The strategy that we are employing for Bovis Lend Lease has been successful
and is compelling.
• In essence, it involves the adoption of a client-centric approach, with a focus on
growth sectors and longer term contracts.
• One of Bovis Lend Lease’s key strengths is its client relationships.
• Over two-thirds of annual workload comes from repeat clients, with some
clients consistently giving us the majority of their work – 100% in some cases.
Bovis Lend Lease – Sector Diversity
Realised GPM by Sector 2003 FY
Sectors Asia US Europe
Pacific
% % %
Commercial/Mixed use 32 21 54
Retail 15 13 18
Residential - 7 3
Defence - - -
Health care - 17 1
Pharmaceutical 12 8 11
Education 2 13 4
Telecommunications 17 - -
Industrial 12 - -
Infrastructure 3 - -
Government 1 5 - 33 Arch Street, Boston
Other 6 16 9
100 100 100 5
• Another key strength is the geographic and sector diversity.
• Bovis Lend Lease has consistently demonstrated its ability to identify and participate in
growth sectors well ahead of the decline in others.
• We are quite comfortable with the various sector exposures.
• However, it is worth noting that sector exposure varies in each region and will fluctuate year
on year in accordance with the mix of work undertaken.
• In Asia Pacific there is quite a degree of diversification. We perform a steady proportion of
work on retail projects, which is mainly on behalf of our managed funds – GPT and APPF.
• We also have a high degree of diversification in the US, where the reliance on the
commercial sector has been around the 20 to 25% range.
• We are anticipating a decline in commercial sector work in the short term, but this should be
largely offset by an increased workload in the education sector, where we are involved in a
number of school upgrade programs across the US.
• The level of work in the health care and retail sectors is also expected to be steady, with retail
underpinned by the BP Alliance.
• In addition, we expect increasing earnings in the defence sector through the Actus Lend
Lease business.
• In Europe, the workload over the past couple of years has been predominantly in the commercial sector and the retail sector, which includes the BP Alliance. • The commercial sector has been particularly strong in the UK, and there is no doubt that this sector will decline with less capital available from the private sector. • However, a third of our involvement in the sector is in relation to UK Government-backed commercial projects, such as the Treasury PFI project and the BBC projects undertaken with Land Securities. • We expect an increase in workload from these Government-backed commercial projects over the next year or two. • We will also see earnings from the Defence sector emerging over the next 5 to 10 years from the SLAM project. • Earnings from the health care sector will also increase substantially over the next few years as we commence work on the UK PFI hospital projects as they reach financial close.
Europe – PFIs
¾ Sectors targeted: Health care & Defence
¾ Longer term, higher margin projects
¾ Strong position established
in Health care sector
¾ Strong pipeline of bids
in progress
Manchester Hospital
6
• With the commercial sector generally weaker in the short term, we have placed a high
degree of focus on PFI projects in the UK, mainly in the Health care and Defence
sectors.
• There are a number of reasons for that: they are clearly growth sectors and they involve
longer term, higher margin projects..
• We have established a very strong position in the PFI health care sector, with a market
share of about 20%.
• Our outlook for the health care sector is positive, as we expect to see around £2 billion
of hospital PFI projects awarded each year for the next 5 to 7 years – we are looking for
our fair share to consolidate our position.
• We are also targeting a 20% market share in the defence sector, although it is still early
days with the £1 billion SLAM project establishing our presence in the sector.
• We are now focusing on a number of other UK defence sector bids on which we are
shortlisted – and which offer longer term earnings potential.
• Our PFI strategy is about targeted bidding; for example, we have won 2 out of 3 bids in
the health care sector over the past 2 years.
• And all in all, we are well placed for future opportunities and to continue that strike rate.
Europe – PFIs
PFI Projects Construction FM Revenue Current End Date
Revenue A$M Backlog(1) A$M Status
Health
– Calderdale Hospital (UK 224.5 47.3 Operational May 2031
– Worcester Hospital (UK) 215.0 94.8 Operational Dec 2031
– Hexham Hospital (UK) 71.8 17.3 Operational Apr 2033
– Brescia Hospital (Italy) 40.3 Under construction Jun 2021
– Roehampton Hospital (UK) 134.4 4.7 Preferred bidder Jun 2033
– Manchester Hospital (UK) 930.2 62.5 Preferred bidder Dec 2037
– Havering Hospital (UK) 496.1 47.5 Preferred bidder Sep 2036
– Leeds Hospital (UK) 475.5 119.4 Preferred bidder Mar 2037
– Burnley Hospital (UK) 69.8 6.5 Under construction Jun 2033
Education
– Newcastle Schools (UK) 116.5 40.6 Under construction Mar 2029
– Lincoln Schools (UK) 45.5 15.5 Under construction Sep 2032
– Lilian Baylis School (UK) 33.9 11.6 Under construction Aug 2029
– Cork Maritime (Ireland) 75.2 13.2 Under construction Aug 2029
Other
– Treasury 1 (UK) 296.6 59.2 Operational Aug 2037
– Treasury 2 (UK) 368.7 75.5 Under construction Aug 2037
Military
– SLAM (UK PPP project) 2,303.5 Under construction No end date
5,897.5 615.6
(1) Only for first 10 years – all PFI contracts run for 30-35 years
7
• You can see the benefits of this focus on PFI projects, as they provide high
quality earnings for the Bovis Lend Lease business, as well as on-going
annuity income streams.
• In addition, we are obviously well placed to provide further services over
the life of the contracts, which typically run for 30-35 years.Integrated Development - US
Actus Lend Lease
¾ Focus on privatised military housing program for US military
¾ PAT up 24% to $4.2M in FY03
¾ Currently bidding on a number of privatisation projects
¾ Achieved preferred bidder on military project in Hawaii:
— US$5B Army RCI project
Project Estimated Estimated Current Contract
Number of Capital Spend Status End Date
Units A$M
Fort Hood, Texas 5,900 470 Operational 2051
Beaufort/Parris Island, South Carolina 1,700 250 Operational 2053
Fort Campbell, Kentucky 4,800 630 Preferred bidder 2054
Army RCI, Hawaii 7,700 2,770 Preferred bidder 2055
20,100 4,120
8
• Our Actus Lend Lease business is focused on the privatised military
housing program for the US military.
• Its profit after tax was up 24% last year.
• This business is now beginning to hits its straps, and we expect it to
become a meaningful contributor to the Group’s earnings in the medium
term.
• We now have 5 privatised projects which will provide a steady workload
over the next five to ten years and beyond.
• Our most recent successes were in Hawaii, where we have been awarded
preferred bidder on both the Army and Air Force projects – only narrowly
missing the Navy bid.
• A number of good opportunities remain, for which we are currently
bidding.
• Our challenge is to convert a reasonable share of these bids over the next
year or two.Integrated Development - Europe
Urban Development
¾ Good progress made on Greenwich Peninsula
project:
– Major planning approvals attained
– First profits expected in FY06
¾ Large scale 15 year+ project
¾ Other opportunities to grow business
Greenwich Peninsula, London
Retail business
¾ Business integrated with both retail
development and investment management
skills
¾ Chapelfield, Norwich on track for September
2005 opening
¾ Completed retail centres performing well
Chapelfield, Norwich
9
• Turning to our integrated development businesses in Europe where we are
focused on the retail sector and large scale urban development.
• We have made good progress on the Greenwich Peninsula project in London,
having achieved all major master planning approvals.
• We are now negotiating the community benefits package with the local
authority, and expect to achieve planning permission and subsequent
unconditionality to start on site in 2004.
• Greenwich should generate good returns for us over a 15 plus year period, with
first profits expected to emerge by 2006.
• We are also focusing on a number of other Urban Development projects in the
UK, including regeneration projects in Bradford and Leeds.• In the retail sector we have integrated our retail development and investment management skills into one business. • The Chapelfield, Norwich project is progressing well, with leasing already at 52% by area. • Construction is on schedule for a September 2005 opening. The majority of development profits will fall into the 2006 financial year. • Our completed retail projects such as Bluewater in Kent and Touchwood in Solihull are continuing to perform well. • We have also been pleased with the continued improvement by the Overgate Centre in Dundee. • Our challenge in the retail business is to create a sustainable business. We have a good start with the Retail Partnerships and strong performing assets like Bluewater and Touchwood, Solihull.
Integrated Development - Australia
Delfin Lend Lease
¾ Focus on large-scale urban centres:
– Master planning
– Urban design
¾ Competitive advantage with strong brand
¾ Well positioned for further operating profit growth in FY04
Urban Development
¾ Focus on large integrated projects:
– Higher density
– Master planning
– Mix of residential, commercial and retail
¾ Contribution to grow over time with
new projects:
– Victoria Harbour
– Rouse Hill Jacksons Landing, Sydney
– Twin Waters
– Strong pipeline
10
• Let’s now turn to our integrated development businesses in Australia.
• Our focus is on large projects that are typically anchored by a residential component.
• Our Delfin Lend Lease business is focused on large scale, lower density, urban
developments in partnership with landowners over periods typically in excess of ten
years.
• Our skill is in the creation of communities through masterplanning and urban design.
• Delfin Lend Lease has a strong consumer brand that provides a level of competitive
advantage.
• Its operating earnings for last year were up 49% to $32 million after tax, and we are
well positioned for further growth in this year.
• The other aspect of our integrated development businesses in Australia relates to
large, higher density, masterplanned projects that typically involve a mix of
residential, commercial and retail.
• The contribution to Group earnings from this business is expected to grow as we
continue to source new projects such as Rouse Hill in Sydney and Twin Waters,
north of Brisbane.
• Together with the Delfin Lend Lease business, the Australian integrated
development businesses are well placed to generate an annual profit after tax of
A$50 million plus and growing.Asia Pacific - Real Estate Investments
¾ Management of listed and
unlisted REITs:
– Investment management
– Development services
– Leasing
– Retail property management
– Project & construction management Erina Fair, New South Wales
¾ Operating profit after tax $33M in FY03
¾ GPT relationship important and provides two way benefits
11
• The final piece of our business model in Asia Pacific is the investment management
business, which produced an operating profit last year of $33 million.
• Our role here is manager of both listed property trusts such as GPT in Australia and
unlisted trusts such as APPF in Australia and APIC in Asia.
• However, we also involve all parts of Lend Lease in providing other services such
as leasing, development, retail property management and project and construction
management.
• The most prevalent use of these services relates to retail assets, in which there is a
A$1.5 billion redevelopment programme planned or under way over the next five
years.
• This business provides a steady level of earnings of $30-35 million after tax per
year, with some growth potential , and is largely underpinned by the management
of GPT.
• Our relationship with GPT is important as it provides two way benefits:
• To GPT as we introduce our real estate skills across the asset portfolio and on
joint ventures such as the Rouse Hill project; and
• To Lend Lease as we add value to GPT and partner them on major projects.Profit After Tax Analysis
A$M 2003 2002
Bovis Lend Lease 133.7 112.7
Actus Lend Lease 4.2 3.4
Delfin Lend Lease 32.0 21.5
Other Asia Pacific development 13.1 24.3
PFI business (24.2) (13.2)
Asia Pacific REI 33.2 18.8
Investment income 61.2 54.2
IBM GSA 12.1 16.8
Group Corporate, Treasury & other operating items (35.5) (55.9)
Net non-recurring items 15.7 64.8
Amortisation – continuing businesses (47.4) (44.4)
Discontinuing REI (net of amortisation) 32.1 23.3
Total Operating Profit 230.2 226.3
12
• Now that you have a better view of our strategy and business mix, I want to
turn to the earnings the businesses provide.
• Our operating result in 2003 of A$230 million, excluding the REI write-
down, was in line with the market guidance maintained throughout last year.
• It was a good quality result with strong earnings growth in the core
businesses and a significant reduction in non-recurring items.
• Looking forward, the discontinued REI businesses’ contribution will be
negligible this year as we are well advanced on exiting those businesses.
• However, earnings growth from the operating businesses, increased
investment income and interest income, and reduced overheads and PFI bid
costs will offset both these lost earnings and the loss of operating earnings
following the sale of our interest in IBM GSA last month.REI Review - Realisation of Value
A$M Financial Year
2003 2004 2005 2006+
Estimated proceeds:
Discontinued business platforms 15 460 - -
Other Net Tangible Assets - 470 15 -
Restructure & transaction costs (10) (190) - -
Net proceeds from divested businesses 5 740 15 -
Co-investments - 60 65 285
5 800 80 285
13
• I only want to briefly touch on the REI businesses that we are exiting.
• I have no doubt that the decision to exit these businesses was the right one.
• Their outlook under Lend Lease’s ownership would have been a continued
drag on our performance.
• Whilst it was disappointing to record a A$945 million after tax writedown
from these REI businesses last year, the key point to note is that the total
exit process will, over time, realise a significant amount of cash that can be
reinvested into the core businesses or returned to shareholders.
• More than A$650 million of the net proceeds have been received to date as
we are very well advanced with the exit process.
• We will also realise approximately A$400 million of co-investments that
relate to the businesses being exited. These will take longer to realise as
this will depend on the liquidation of related funds in accordance with the
funds’ investment criteria.Capital Management
¾ Returning surplus capital to shareholders
¾ 10% share buyback commenced 13 June 2003
¾ 21.8 million shares acquired to 30 September 2003
– 5% of shares bought back
¾ Seeking shareholder approval at AGM to increase size
of total buyback to 20%
14
• We are continuing to address the efficiency of our capital structure.
• Lend Lease has surplus capital and we are returning it to shareholders, but it will
take some time to get to our optimal capital structure.
• We commenced a 10% on-market share buyback in June and have acquired 21.8
million shares to the end of September, which is approximately 5% of shares on
issue.
• Based on trading to date, it is likely that this buyback will be completed by the end
of January 2004.
• We already have a strong financial position and cash balances. With the significant
level of proceeds expected from the exit of the REI businesses, it is clear that the
Group will continue to have surplus capital.
• Rather than simply waiting until mid June 2004 when we could commence a further
10% on-market share buyback, we will put a resolution to shareholders at the AGM
in November, to allow Lend Lease to buy back a further 10% of its issued capital.
• Our challenge is to identify and achieve an optimal capital structure.Dividends
¾ Final FY03 dividend 20 cents per share – unfranked
– 2nd half payout ratio 73% in line with policy (60-80%)
¾ Revised dividend policy due to:
– Changed investor attitudes
– Surplus capital position, and
– Level of Australian tax losses
¾ Both interim and final 2004 dividends expected to be
unfranked
15
• We announced in May a change in our dividend policy, including
increasing the payout ratio to between 60 to 80%.
• The final dividend of 20 cents per share, unfranked, is consistent with that
policy at 73% of operating profits in the second half.
• We changed our dividend policy for a number of reasons:
• Firstly, investor attitudes in general had moved towards a yield
preference;
• Secondly, our continued level of surplus capital made it impractical to
continue what was effectively a low payout ratio; and
• Finally, recent changes to Australian tax law made it desirable to pay
unfranked dividends while conducting an on-market share buyback.
• We expect both the interim and final 2004 dividends to be unfranked, given
the level of the Group’s Australian tax losses that will be utilised over the
next year or two.Return on Equity
2003 2002
¾ Return on Equity (ROE):
– Reported operating earnings 6.5% 6.1%
– Pre-amortisation operating earnings 8.5% 8.2%
¾ Targeting ROE in excess of Cost of Equity
(approx. 11%) over next 2-3 years
¾ Expect pre-amortisation ROE to exceed cost of
equity in FY05
16
• I want to wrap up by looking at our returns to shareholders and our earnings
outlook.
• Return on equity on reported operating earnings was 6.5% for last year,
whilst pre-amortisation return on equity was 8.5%.
• Our expectations for pre-amortisation return on equity is to exceed our cost
of equity in the 2005 financial year.
• Obviously this outlook is dependent on completing both the current and the
proposed buybacks.
• So a positive outlook for shareholder returns in the short term.
• Particularly when you consider that we will not need to sell our interests in
Bluewater and King of Prussia to achieve a return in excess of our cost of
capital.
• This allows us the flexibility to realise these investments at the most
appropriate time in a manner that maximises shareholder value.
• Let’s now turn to our earnings outlook.Earnings Outlook
¾ A number of factors impacting on 2004 FY earnings
¾ 2004 FY earnings outlook in line with market
consensus
¾ Share buybacks allow eps growth in 2004 FY
¾ Company well positioned for stronger eps growth in
2005 FY
17
• There are a number of factors that will impact on 2004 earnings.
• Firstly, EBITDA will be down as a result of the exit from the REI businesses. At a reported
earnings level, this will be largely offset by a reduction in amortisation and increased interest
earnings from the proceeds on the businesses sold.
• Total interest earnings will also be impacted by the timing and amount of the share buyback
programs.
• The majority of the net A$88 million cost saving initiatives have been implemented and as a result
we are confident of achieving significant earnings growth in our continuing core businesses in
2004.
• We gave operating earnings guidance back in August when we released our results which was
subsequently adjusted by the market to a consensus of A$230 – A$235 million after tax following
the sale of our interest in IBMGSA.
• We are comfortable with that consensus, which excludes the A$80 million after tax profit on the
sale of IBM GSA and does not rely on contributions from the sale of any major assets or
businesses.
• It is worth noting that with the impact of the share buybacks, we expect to achieve reasonable
reported eps growth in 2004 – well in excess of 10% if you adjust for the IBMGSA sale.
• With the majority of the buyback impact benefiting the 2005 financial year, we expect further
strong eps growth in that year.Lend
Lend Lease
Lease
October
October 2003
2003
18
• So, in summary, I think we have achieved a lot in a relatively short period
of time.
• We have a simpler and more focused strategy.
• And, importantly, our outlook is clearer and much improved on this time
last year.
• On that note I will open the floor for questions.You can also read
