Skipping Down The Hungry Mile

This story features LENDLEASE GROUP. For more info SHARE ANALYSIS: LLC

– LLC secures more than enough funding for Barangaroo 1 and 2
– Rent deals exceed expectations
– Much scope to unlock value ahead

By Greg Peel

Property developer Lend Lease ((LLC)) had previously announced it secured Westpac, KPMG and itself as tenants for the first two, as yet uncompleted, office towers at the Barangaroo site on Sydney Harbour, representing 70% of available space. Yesterday the company announced it had secured the funding to proceed with completion.

FNArena noted last week that Canadian pension funds were actively seeking further secure investments in Australian property and infrastructure (Canadian Pension Funds Sniffing Around) and of the $2bn committed to the two towers, $1bn will come from the Canadian Pension Plan Investment Board, with a collective $500bn chipped in by APPF Commercial, First State Super and Telstra Super with the balance of $500bn to come from Lend Lease itself via retained cash and existing debt facility drawdowns. The third party partners have also all expressed interest in investing in a third tower.

The funding deal further de-risks Barangroo for LLC and the company will begin to recognise project profits from FY13, earlier than initially assumed by analysts, and further profits should be generated by the ultimate sale of LLC's retained 25% stake, most likely on completion, albeit no lock-in provision means sell-downs can occur at any time. Effective rents have been set at $800/sqm which is around 10% higher than analysts were expecting. Assuming 3% per annum growth and completion in 2015-16, Credit Suisse calculates an implied rent of $915/sqm which is 20% above prime CBD rents. Moreover, LLC has not had to concede to any rent guarantees for investors.

Deutsche Bank is among those brokers noting that the deal not only secures sufficient capital to fund the first two towers, but also goes a long way to funding a third tower. Hence it is not assumed LLC will need to raise any further equity. Project gearing levels will remain comfortably low.

“Today's news reflects well on LLC's ability to roll out its $20bn of urban regeneration projects.” suggests BA-Merrill Lynch, “as more investors seek yield from well leased real estate in a lower interest rate environment”. Credit Suisse believes the market will now focus on the other 93% of LLC's business, and warns there remains downside risk to Australian construction given greater fiscal austerity and a potential slowdown in the infrastructure capex pipeline. However RBS Australia is very complementary on LLC's pipeline management.

RBS notes Barangaroo construction work will be completed using LLC internal resources which “is timely as the non-residential market does continue to weaken,” the analysts suggest, “and this project helps underpin a portion of the earnings and allow engineering construction projects (where there is greater strength) to drive infrastructure earnings higher”. RBS believes the seeding of projects which will occupy LLC for the next five years was completed at a good time in the cycle when asset prices were GFC-impacted.

UBS notes the next point of interest will be the $1.5bn Sunshine Coast University Hospital public/private partnership for which LLC is short-listed. The project is expected to be awarded in the next week or so.

In the meantime, “We believe LLC is materially undervalued,” says RBS. “We believe success with other major projects and stronger infrastructure earnings will help unlock the inherent value and result in a higher share price”.

The news was enough to see Merrills upgrade its recommendation on LLC to Neutral from Underperform, joining Credit Suisse. All other FNArena database brokers have a Buy or equivalent rating. A glance at Stock Analysis provides a consensus target price of $8.99 – reflecting 20.5% forecast upside. Consensus estimates provide yield in FY12 of 4.9% and in FY13 of 5.7% on today's price. 

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