Lend Lease goes back to tried and tested LPT formulaFont Size:...

Lend Lease goes back to tried and tested LPT formulaFont Size: Decrease Increase Print Page: Print Adele Ferguson | October 14, 2009
Article from: The Australian
WHEN Lend Lease shareholders sign off on a proposal to create a listed property trust on November 12, they will mark the start of a new era for the company and the next part of the cycle for the battered property sector, which has suffered massive losses and even bigger writedowns.

The Lend Lease announcement, which portends future merger and acquisition activity, came as Mirvac Group announced it would simplify its balance sheet by mopping up the remaining 75 per cent of the Mirvac Real Estate Investment Trust it did not own and speculation mounted that Morgan Stanley would launch an initial public offering on part of a $6 billion property portfolio it bought at the height of the LPT market.

All in all, the LPT sector has rebounded 85per cent from its March 9 lows, outperformed the general equities market by more than 16 per cent over the past six months and raised more than $14bn in placements and rights issues in the process.

For Lend Lease the LPT move will be a virtual back-to-the-future experience for shareholders after it lost the lucrative GPT management rights in 2005. Most importantly, though, it heralds the start of a thawing of activity in the LPT sector, with this new entity expected to be at the forefront of asset and LPT takeovers.

Lend Lease boss Steve McCann might argue the new entity has no immediate plans and it is purely a vessel for a more efficient capital structure, but that would be poppycock.

Firstly, it is expensive to set up Lend Lease as a stapled entity via an in-specie distribution of units on a one-for-one basis to shareholders in a newly created trust.

Secondly, McCann is a renowned deal-maker, having come from ABN Amro (now Royal Bank of Scotland) as head of its equity capital markets business, so he will no doubt be looking at what assets and LPTs Lend Lease might consider first.

Some expect it to look at some of the Centro assets or make a bid for Mirvac Group, which is cashed up and has a relatively open share register after a cornerstone investor, debt-stricken Middle East group Nakheel, dumped its 12 per cent stake.

It would not be the first time Lend Lease has looked at Mirvac. Two years ago Mirvac chief executive Greg Paramor was a keen seller after approaching companies including Leighton Holdings and Lend Lease. In December 2007 Lend Lease and Mirvac admitted to the ASX they were having talks, but the deal failed.

At the time Mirvac's shares were trading at $6.20, compared with the current share price of $1.58. It is understood Leighton was also approached but rejected the offer because Mirvac's asking price was too high.

To help the situation along, Mirvac has announced it will buy the remaining 75 per cent stake in the Mirvac Real Estate Investment Trust -- a trust with a $1bn portfolio that Mirvac manages -- at a staggering 36 per cent discount to June net tangible asset backing. The takeover offer is overwhelmingly disappointing to Mirvac Real Estate Investment Trust shareholders but because nobody else will deal with it due to its myriad problems, Mirvac will win the day. In the process it will simplify the Mirvac balance sheet and its over-complicated strategy.

Simplicity is now the name of the game in the LPT sector, and the stapled Lend Lease entity will have that in spades.

Fund managers want LPTs to be low-geared, conservative entities with stable earnings streams and transparent balance sheets. Most are still unravelling the mess they got themselves into, while Lend Lease can start with a clean slate.

Indeed, it cites the following key benefits of the stapling: more predictable distributions on income generated from passive assets, yield enhancement from income streams on passive assets, enhanced cash position of investors through capital returns that are treated as tax-deferred and improved liquidity.

This has been a long time coming for Lend Lease shareholders.

Almost a decade ago it was one of the most successful and stable blue-chip companies. It had a big funds management arm, MLC, and it produced double-digit earnings growth every year.

It did that by "smoothing" profits by various means, including selling equity stakes in listed companies and by having a funds management arm and management rights to an LPT that balanced its lumpy construction and development business.

When it sold MLC to National Australia Bank in mid-2000 and stopped taking equity stakes in companies, it became subject to the vagaries of the property and construction markets.

The volatility increased when it lost the management rights to GPT in 2005 after launching a takeover offer.

Winning the bid for GPT it would have allowed Lend Lease to retain ownership of more of its future developments while distributing more income more efficiently to its stakeholders.

The latest proposal is a return to an old formula.

When the property markets pick up, and asset valuations stabilise, both domestically and abroad, it would not be surprising if McCann raised some money for the fund by divesting some of its stakes in big shopping centres.

The most probable include the King of Prussia shopping mall in Pennsylvania, and its smaller stake in Britain's Bluewater shopping centre in Kent, both of which would give the company hundreds of millions of dollars to spend on other assets, which it could put in the trust without paying company tax.