Lendlease (LLC) Switch
We believe investors would benefit from a switch out of the LLC 31s and/or LLC 27s into the Lendlease International Towers Sydney (LLITST) 30s. Not only would there be a jump up two-notches in rating from Moody’s (Baa1 versus Baa3), but there would be no sacrifice on overall yield.
Remember LLC is Baa3, and so one notch downgrade away from a non-investment grade rating. While we do not expect a downgrade to non-investment grade status, the risk/return favours an LLC switch – especially when the implications from COVID-19 are still unknown on the business.
The Investment Strategy
- Low risk, non-IG paper rated BB-/BB+ (S&P/Fitch)
- LLITST is rated two-notches above LLC from Moody’s (Baa1 versus Baa3). Both issuers are not rated by S&P
- LLITST will be less impacted from COVID-19 compared to LLC on a relative basis
- LLITST 30s are yielding 2.5%, so just below the LLC 31s – but well above the LLC 27s
- LLITST 30s are trading at a much lower cash price than the LLC 31s and LLC 27s
LLITST (Baa1/Stable, Moody’s) is a separate vehicle which holds three commercial properties in the Barangaroo South precinct in Sydney and is managed by Lendlease. The properties in the Trust include Barangaroo International Towers, Sydney Tower Two and Tower Three, medium-low rise International House, as well as the Towns Place carpark. The three commercial properties are basically at 100% occupancy. LLITST is less impacted from COVID-19 as leases are long-term and the company has the longest weighted average lease expiry (WALE) out of the listed A-REITs in the market.
LLITST’s Asset Portfolio
Source: Lendlease International Towers Sydney Trust
LLC FY21 results
LLC (Baa3/Stable, Moody’s) reported weak FY21 results and noted that FY22 would be a challenging year for the group due to COVID-19 on its business – especially in its London operations. Prior to FY22 results, the company noted that FY21 core operating earnings were to be in the range of AUD375-400m, around half of the AUD800m+ it earned in pre-COVID years.
Additionally, the group announced higher provisions of around AUD90-175m in relation the engineering business, which was sold in September 2020. As a result, Statutory net profit after tax (NPAT) was expected to fall to between AUD200m and AUD320m.
The group is currently going through a strategic review which will result in cost savings of around AUD160m per annum in the medium to long term. However, in the short term, impairment expenses (noncash) will rise over FY22. The groups balance sheet and gearing remain solid, with gearing at the bottom end of the target 10-20% range. LLC’s bonds have also outperformed over CY2021 and are now trading expensive to other low BBB names in the market.
Chart 1. LLITST 30s versus LLC 31s and LLC 27s yield (%) performance
Chart 2. Comparables for LLITST 30s (see low cash price)