Why Lend Lease Profits Dropped 25% — and Which Property Shares to Buy Instead

Lend Lease [ASX:LLC] opened at $13.80 this morning. On Friday, it closed at $14.30. As at 11.00am, it’s trading down 2.17% at $14.00.

LLC Lend Lease 24082015
Source: Google Finance
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Wondering why LLC shares are down? It’s the FY15 results. LLC released its financial reports this morning.

Total group profit before tax is down from $998.6 million to $768 million.

Post-tax profit is down from $822.9 million to $618.6 million.

The full year dividend is down from $0.71 to $0.54.

Tony Lombardo is the Group CFO at LLC. He says the dip in profits is just temporary. ‘Following the sale of Lend Lease’s interest in the Bluewater Shopping Centre asset in June 2014, we have been able to redeploy capital proceeds into our existing development pipeline, delivering a growing earnings profile while prudently managing our balance sheet,’ said Mr Lombardo.

That makes it sound like the lower profits were just because of the sale. And that’s kind of right. But there’s more going on here. CEO Steve McCann touched on LLC’s outlook.

We are targeting measured growth in international markets over the medium term. We have made strong progress on our targets, with the origination of circa $8 billion of new major urban regeneration projects in Asia and the Americas in the last year.

In other words, they’ve sold assets and business in some countries. And they’re going to put the money into other projects.

One of those urban regeneration projects is in Kuala Lumpur, Malaysia. LLC is in a joint venture to develop the Lifestyle Quarter at Tun Razak Exchange (TRX). TRX is basically a fresh new financial district, designed from scratch. LLC will be doing a hotel, three residential towers, and a central park.

But overall, TRX has been progressing very slowly. The Malaysian government officially announced the project in 2010. Late last year, rumours spread about major Middle Eastern investors pulling out because of the delays. And the lack of transparency. In July, corruption allegations rocked TRX. The Malaysian prime minister was accused of siphoning off money raised for TRX through a bonds issue.

Another project is River South, in Chicago. LLC will be building five towers with local firm CMK. The tallest will be 47 stories high. That’s a lot of apartments. But they may be too late to take advantage of the boom. In September last year, Crain’s Chicago Business said downtown Chicago used independent research to demonstrate that downtown prices were very close (within around 4.3%) to their pre-GFC peaks. Mark Stern is a senior VP at Waterton Associates, a local real estate investment firm. In late July, he said the Chicago market was ‘near a peak, with a little more room to grow.’ By the time Lend Lease gets River South done, it might not bring in as much as management predicts today.

But again, that’s difficult to predict. Because it’s not a developed neighbourhood, there’s no data from which to extrapolate future room for price growth. Surrounding neighbourhoods are ‘hot’ on several price growth maps. But River South might be just in time to cater to pent-up demand.

Some LLC shareholders will be happy to wait and see what happens. But many investors don’t want to wait. And for them, there are plenty of other options.

Money Morning publisher Kris Sayce has a few to suggest. Kris has written a report titled ‘Three Best Investments in Australia for 2015 and Beyond’. In this report, Kris discusses three different property-related stocks. Each has exposure to different markets. One follows the property index. One is a residential land owner and builder, with most of its projects in Australia. The last is a commercial property fund that leases to one of Australia’s biggest retailers. What they all have in common is that, over the year to date, they’ve dramatically outperformed LLC. Find out how to download your free copy of Kris’s report now.

Eva Mellors,
Contributor, Money Morning

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