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20 December 2000
Questions and Answers - Teleconference (Robert Tsenin, David Ross, Dick Morath) - Including additional information following review of audio tape.
We have now reviewed the audio tape of the conference call and additional information has been included.
Introduction from Robert Tsenin
We said at the AGM that the next 12-18 months was a period of transition for Lend Lease and that we may need to make a provision for coolsavings. In the annual report we said our operating businesses, with the exception of Fox, continued ‘to perform soundly and we are optimistic about the growth potential over the longer term.’ That remains the position.
Specifically:
 | Our development business will make a marginal contribution because the Fox writedown will more than offset the Bluewater sale which occurred in July (the lower profit Prudential tranches. |
 | Bovis Lend Lease is on track to double its profits in 4 years as previously stated. In the Real Estate Investments business, Project Enterprise (business simplification process) is on track. New funds have been launched and our joint venture in Europe with Generali is significant. In the US legislation has just passed that provides for a 40% increase in the tax credit over the next 2 years starting immediately in 2001, and for a significant increase in tax-exempt bond authority which increases the supply of credit investments. In terms of capital raisings, continuing stock market volatility has impacted on decisions to invest in real estate equity investments, and interest rate volatility has impacted decision making in regard to debt investment in real estate. This has delayed some capital raisings which we anticipated would happen by close December. |
Overall, it is difficult to forecast Lend Lease earnings at present. We are holding large cash balances post the sale of MLC. There are a number of ways to deploy this capital and the various ways impact the bottom line:
| 1. | leave it in the bank – 6% pre-tax. |
| 2. | Invest in operating businesses – there are often no cash earnings at the beginning. |
| 3. | Use it to repay off balance sheet non-recourse debt which can mean we forego interest earnings but have no corresponding reduction in interest expense (as has happened on the Solihull project). |
| We have declined to give an eps target while the balance sheet is being re-organised. |
Questions and Answers
| 1. | The market consensus was a profit figure for Lend Lease of around $330m. Why is your estimate so low?
The market consensus was not comparing like with like, as some forecasts included significant one-offs and others did not. A number of the market estimates sat at $280-290m. There are a number of factors in addition to the coolsavings and Real Estate Investments results. We are holding a significant amount of cash post the MLC sale. The market expectation was that we would have made an investment/acquisition by now which would have earned a higher rate of return than cash balances. In addition, our earnings on cash balances have been lower given lower cash rates and the fact that we have utilised some of the cash in areas that are not producing any immediate profit (eg co-investing in Lend Lease managed funds, repayment of off balance sheet debt on Solihull project). This should have been factored into the forecasts. Other adjustments at year end, while not significant of themselves, have a cumulative effect. |
| 2. | Your announcement says Real Estate Investments is slightly below your expectations. How much below?
We said that Bovis Lend Lease was tracking slightly better than our expectations, but Real Estate Investments was tracking slightly worse than our expectations. But Real Estate Investments is twice the size of Bovis Lend Lease. Netting the two things together, we would be in a range of around A$10-20m below. |
| 3. | What is driving your lower expectation for the Real Estate Investment business?
In terms of capital raisings, continuing stock market volatility has impacted on decisions to invest in real estate equity investments, and interest rate volatility has impacted decision making in regard to debt investment in real estate. This has delayed some capital raisings that we anticipated would happen by close of December 2000. Since the AGM there has been some compression of fees in the HCI business in the US. The fee compression was caused by the increase in interest rates earlier in the year and the increase in tax credit investor's yield requirements. The bulk of revenue from that business is earned in December. However legislation has just passed in the US that provides for a 40% increase in the tax credit over the next 2 years starting immediately in 2001, and for a significant increase in tax-exempt bond authority which increases the supply of credit investments. So that is a positive for the HCI business.
In regard to FUM, we can't yet be specific because the appraisal process of valuing assets occurs in this quarter so we don't yet have a definitive figure. However, Real Estate Investments FUM looks to be growing at just under 5% for the 6 month period, i.e. at an annual rate of just under 10% p.a. |
| 4. | How is the AMRESCO mortgage origination group going?
It has been a tough environment to raise capital in the last months. We were looking for better than 5%, and will focus during the second half on improving that. Falling interest rates would help. |
| 5. | Does the changing nature of fees affect your view on the growth of the Real Estate Investment business?
There is some pressure on fees. We are starting to see more of a loading towards incentive rather than annuity fees, and fees depend on timing and performance. The success of business simplification programs like Enterprise in the US are also critical. |
| 6. | Estimation of amortisation costs - were they higher than expected? Have all been included? You said that asset sales were excluded, but what about bringing in the profit from the Westpac shares?
Approximately A$1-2m higher. Our policy remains unchanged - we are offsetting amortisation charge with Westpac proceeds and have not accelerated this program. However, these profits are included in coming up with the A$210-230m range. All amortisation charges have been included. |
| 7. | What are you doing in relation to overheads generally?
Following the sale of MLC we have targeted a number of shared services overheads to be reduced. Overheads generally have been clearly targeted by David Higgins to be reduced. We are on track to achieve some fairly significant cost savings, however you may not necessarily see immediate results. In time we expect an overhead reduction of around A$30m in Australia. |
| 8. | Any signs that residential projects in Australia will bring in more revenue?
Residential projects in Australia, such as North Lakes are going well and we anticipate re-zoning of St Marys soon. We are one of 2 bidders for Victoria Harbour Docklands project in Victoria. Profits will not be as lumpy as previous years but will be a reasonable contribution. |
| 9. | What is your cash flow projection and investment profile going forward?
We do not see our business as a capital intensive business. In fact, our divisions generate strong cash flows. David Higgins has driven a strong charge to liquify our balance sheet so you will see Lend Lease generate a lot of cash over the next years. |
| 10. | Are we going to see more volatility in your results going forward?
We are now in businesses which have much more regular income streams. Reducing volatility is how our businesses are now managed, with a greater proportion of annuity stream income. Geographic and product diversification, as well as clients alliances and long term contracts (eg Actus, private finance initiatives in the UK) give us greater security. What we see in time is more predictable earnings and that means less volatility. We will not smooth results. |
| 11. | Capital structure - will it be right in 12 months time?
We have a number of options - return capital, repay debt, invest in our businesses. There are a number of small acquisitions on the horizon. |
| 12. | Could you carry out a buy-back right now?
We have shareholder approval to buy back approximately another 7% of our shares in the period to 18 August 2001, but have no current plans to do so. |
briefing
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