I have taken a few short strolls from Wynard Station to Barangaroo since it was transformed from a complex construction site to a bustling new part of Sydney’s CBD. Recalling how pessimistic some people were about this massive project undertaken by Lendlease I note that the offices are full and the cafés and restaurants busy.
Fast forward a few years later and the market is now concerned about defaults on apartments. Lendlease recently reported their first half 2017 results and reported a less than 1% default rate (historical average 3%) and, more importantly, a 21% increase in operating earnings. What the market continues to forget is the diversity of Lendlease’s earnings base, with 40% coming from investments (a strong annuity earning stream), 24% from construction and 36% from development, which not only consists of apartment earnings but also commercial and communities globally. So while the market may well continue to focus on default rates, Perennial Value will be focusing on the $49 billion development pipeline, the $20.5 billion of construction backlog revenue and the $24.7 billion in funds under management that will underpin Lendlease’s earnings for many years to come.
Further, the balance sheet is rock solid with CEO, Steve McCann, leading one of the best management teams in the country. Meander down to Barangaroo and admire the magical space Lendlease has created and remember that this Australian company is creating similar places like this all around the world.
John Murray established Perennial Value in January 2000 and has 30 years industry experience. He is one of Australia’s most respected value investors and has built a stable team of investment professionals delivering consistently strong returns.