##{"id":60229,"date":"2012-07-10T11:02:02","date_gmt":"2012-07-10T01:02:02","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/07\/10\/skipping-down-the-hungry-mile\/"},"modified":"2012-07-10T11:02:02","modified_gmt":"2012-07-10T01:02:02","slug":"skipping-down-the-hungry-mile","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/07\/10\/skipping-down-the-hungry-mile\/","title":{"rendered":"Skipping Down The Hungry Mile"},"content":{"rendered":"

\n\t– LLC secures more than enough funding for Barangaroo<\/span> 1 and 2
\n\t– Rent deals exceed expectations
\n\t– Much scope to unlock value ahead<\/strong><\/p>\n

\n\t
\n\tBy Greg Peel<\/p>\n

\n\tProperty developer Lend Lease ((LLC)) had previously announced it secured Westpac, KPMG and itself as tenants for the first two, as yet uncompleted, office towers at the Barangaroo<\/span> site on Sydney Harbour<\/span>, representing 70% of available space. Yesterday the company announced it had secured the funding to proceed with completion.<\/p>\n

\n\tFNArena<\/span> noted last week that Canadian pension funds were actively seeking further secure investments in Australian property and infrastructure (Canadian Pension Funds Sniffing Around<\/a>) and of the $2bn<\/span> committed to the two towers, $1bn<\/span> will come from the Canadian Pension Plan Investment Board, with a collective $500bn<\/span> chipped in by APPF<\/span> Commercial, First State Super and Telstra Super with the balance of $500bn<\/span> to come from Lend Lease itself via retained cash and existing debt facility drawdowns<\/span>. The third party partners have also all expressed interest in investing in a third tower.<\/p>\n

\n\tThe funding deal further de-risks Barangroo<\/span> for LLC and the company will begin to recognise<\/span> project profits from FY13<\/span>, earlier than initially assumed by analysts, and further profits should be generated by the ultimate sale of LLC's retained 25% stake, most likely on completion, albeit no lock-in provision means sell-downs can occur at any time. Effective rents have been set at $800\/sqm<\/span> which is around 10% higher than analysts were expecting. Assuming 3% per annum growth and completion in 2015-16, Credit Suisse calculates an implied rent of $915\/sqm<\/span> which is 20% above prime CBD<\/span> rents. Moreover, LLC has not had to concede to any rent guarantees for investors.<\/p>\n

\n\tDeutsche Bank is among those brokers noting that the deal not only secures sufficient capital to fund the first two towers, but also goes a long way to funding a third tower. Hence it is not assumed LLC will need to raise any further equity. Project gearing levels will remain comfortably low.<\/p>\n

\n\t“Today's news reflects well on LLC's ability to roll out its $20bn<\/span> of urban regeneration projects.” suggests BA-Merrill Lynch, “as more investors seek yield from well leased real estate in a lower interest rate environment”. Credit Suisse believes the market will now focus on the other 93% of LLC's business, and warns there remains downside risk to Australian construction given greater fiscal austerity and a potential slowdown in the infrastructure capex<\/span> pipeline. However RBS<\/span> Australia is very complementary on LLC's pipeline management.<\/p>\n

\n\tRBS<\/span> notes Barangaroo<\/span> construction work will be completed using LLC internal resources which “is timely as the non-residential market does continue to weaken,” the analysts suggest, “and this project helps underpin a portion of the earnings and allow engineering construction projects (where there is greater strength) to drive infrastructure earnings higher”. RBS<\/span> believes the seeding of projects which will occupy LLC for the next five years was completed at a good time in the cycle when asset prices were GFC-impacted<\/span>.<\/p>\n

\n\tUBS notes the next point of interest will be the $1.5bn Sunshine Coast University Hospital public\/private partnership for which LLC is short-listed. The project is expected to be awarded in the next week or so.<\/p>\n

\n\tIn the meantime, “We believe LLC is materially undervalued,” says RBS<\/span>. “We believe success with other major projects and stronger infrastructure earnings will help unlock the inherent value and result in a higher share price”.<\/p>\n

\n\tThe news was enough to see Merrills<\/span> upgrade its recommendation on LLC to Neutral from Underperform<\/span>, joining Credit Suisse. All other FNArena<\/span> database brokers have a Buy or equivalent rating. A glance at Stock Analysis provides a consensus target price of $8.99 – reflecting 20.5% forecast upside. Consensus estimates provide yield in FY12<\/span> of 4.9% and in FY13<\/span> of 5.7% on today's price. <\/p>\n

\n\t
\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"