1
LEND LEASE
ACQUIRES
CROSBY GROUP
June 2005
Presenter: Greg Clarke, Group CEO
• Good afternoon, ladies and gentlemen – thank you for joining the call.
• The purpose of today’s session is to provide more information to round
out your understanding of our acquisition of Crosby announced earlier
today.
• Today we are providing:
– The background to the transaction
– How it fits into our UK Communities business
– Key metrics of the Crosby business
– The transaction financials; and
– Guidance on the likely outcomes for the Group.
• The transaction follows recent growth in our wholesale funds platform and
the completion of our acquisition of the rapidly growing Actus Lend Lease
business in the US.
• Let’s go to our agenda.
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Agenda
¾ Overview
¾ Group Strategy
¾ UK Residential Market Dynamics
¾ Crosby Homes
¾ Strategic Fit and Synergies
¾ Integration Strategy
¾ Acquisition Metrics
¾ Summary
¾ Q&A
• After an overview of the transaction, I’ll take you through our Group
strategy.
• Some of you may have seen this before, but it’s worthwhile reviewing post
GPT’s internalisation.
• Then I would like to cover off the key drivers in the UK residential market
which support both our Communities and Retail strategy in the UK and the
acquisition of Crosby.
• I will then provide some insight into Crosby itself and how it operates, as
well as giving an overview on key projects.
• I’ll then ask Roger Burrows to talk to the financials of the transaction and
outcomes for the Group in terms of earnings accretion and our balance
sheet capacity for pursuing other initiatives in the future.
• This is intended as a high level presentation which will be followed up by a
management presentation post completion of the transaction and after
Lend Lease’s full year results announcement mid August.
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Overview
¾ Acquisition of 100% economic interest in The Crosby Group plc for approximately
£261m (A$615m)
¾ Leading urban regeneration developer – high-quality management team, solid
earnings outlook and strong asset backing
¾ Strategic extension to Lend Lease’s UK Communities business platform
¾ Adds built-form product development, high-density dwelling construction to existing
community development capability
¾ Broadens scope for Lend Lease participation in major land development schemes,
Government sponsored affordable housing and urban regeneration projects, and
mixed-use retail / residential projects
¾ Earnings enhancing for Lend Lease
– Minor EPS accretion in FY06 (under AIFRS)
– Expected to be materially accretive thereafter
• As you know Lend Lease is well-positioned in the high-growth London and
South East UK residential markets.
• Crosby is a respected brand, with strong market positions in major
regional centres such as Birmingham, Manchester and Leeds.
• The acquisition supports our growth strategy, augments our existing
Communities business, enhances our skill base and broadens our offering
to the UK market.
• Perhaps more importantly, it provides us with the scale and national
footprint that we consider necessary to underpin our ability to partner with
Government and Government agencies.
• It brings specific skills in urban renewal and high-density residential to our
Communities business …
• A strong backlog of work for the next 4 years …
• And a sound business model that provides good visibility of earnings.
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¾ Markets targeted are ‘deep’
¾ Lend Lease has advantaged positions and has secured a large pipeline for
growth (interest in projects with value circa $20b)
¾ Significant opportunities for consolidation
¾ Lend Lease’s balance sheet remains strong
Double digit earnings growth
¾ Protected positions come from integrated skills
¾ Strong Group synergies in terms of generating opportunities and developing
leading property skills (Lend Lease’s privatisation positions are an example)
¾ Boosts growth and returns for shareholders
Construction Management &
Investment Management
¾ Lend Lease should expand along sector (not business unit) lines
¾ Regional retail and master planned communities are the most attractive sectors
(including ‘mixed-use’ opportunities within these ‘footprints’)
¾ Lend Lease has leading skills in both sectors
Retail & Residential
¾ Must go beyond Australia (mature and small)
¾ Opportunities not ‘global’; UK & US the first focus
Inter national
‘A leading international retail and residential property group, supported by strong construction
management and investment management businesses delivering double digit earnings growth’
‘A leading international retail and residential property group, supported by strong construction
management and investment management businesses delivering double digit earnings growth’
Group Strategy
• To place the transaction in context, let’s walk you though Lend Lease’s
strategic ambitions:
– We want to capture growth opportunities internationally in specific
markets where we have established platforms
– We want to focus on retail and residential
– We will exploit integrated skill-set across construction management
and investment management
– Our overall aim is to generate double-digit earnings growth based on
participation in deep markets where we have established positions
– And we have a measured approach to maintain balance sheet
strength.
• The acquisition is clearly consistent with this strategy and is underpinned
by a UK residential market with sound long-term fundamentals.
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100
120
140
160
180
200
220
240
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
'000s
Housing Starts Net new households
Excess demand - 33k units p.a.
UK – housing starts v net new households
Source: ODPM, Scottish Executive 2004
¾ Long term undersupply of circa 33,000 p.a.
¾ Household formation has grown strongly, particularly smaller family units
¾ Lack of greenfield land together with infrastructure overload encourages high-density
development on brownfield sites
– Urban regeneration
UK Market Dynamics in Our Favour
Projected household growth (by region) 2001 to 2021
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
No
r
th
No
r
th West
Yorks & Humberside
East M
i
dl an d
s
West Midlands
East
London
South Eas t
South West
Region
Average annual new households
0%
5%
10%
15%
20%
25%
% total growth
Average annual new households Total % Growth
Source: ODPM
• As this slide shows, the UK market dynamics and public policy are working in our favour.
• Firstly, on the supply side, we need to recognise that the UK has suffered from a long-
term underinvestment in residential homes. This was highlighted in the recent UK
Government Barker review.
• The shortage has been fuelled by a number of factors. These include highly restrictive
planning, the decline in local authority housing construction and limited housing
association construction.
• This is set against the market fundamentals:
(1) Continuing population growth
(2) A continuing decline in average household size
(3) Stable affordability and house price trends, and
(4) Reduced barriers for residential investment property (sometimes called buy-to-let).
• The result is a 30,000 plus shortfall each year, notwithstanding 190,000 annual housing
starts.
• As well, there is a growing investor appetite for residential property which Crosby has
successfully tapped into.
• The Government is alive to the shortfall and issues of affordability.
• So there is great potential for the right product.
• I will elaborate a bit more on the UK policy drivers on the next slide.
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¾ Need for increased housing supply (especially affordable)
¾ Recycling of brownfield land
¾ Focus on urban regeneration (no more Bluewaters / greenfield regionals)
– Lessening transport dependence
– Increased emphasis on mixed-use (retail / residential / commercial)
¾ Improving social infrastructure (schools and hospitals)
¾ Encouragement of residential investment vehicles
– REITs and SIPPs (“Self Invested Pension Plans”)
¾ Leads to opportunities in
– Mixed-use, residential-led schemes in existing urban areas
– Master planning / delivery to include private and social infrastructure (i.e. PFI)
– Sponsoring of REITs and other funds to invest in completed projects
UK Trends in Public Policy in Our Favour
• On the policy front, the signs are also good …
• Piecemeal development of land will not satisfy the shortfall.
• Hence the focus on brownfield sites (inner urban) ripe for regeneration:
– Inner urban regeneration places less demand on outlying
infrastructure provision
– This in turn provides the impetus for larger scale master-planned
development in brownfield settings.
• As well, from April 2006, the Government is allowing residential
investment property into self-invested super funds, or SIPPS as they are
known, and there is consideration of REITs which could provide further
investment support for the sector.
• We have the skills in master-planning.
• Crosby is well versed in maximising utility and appeal of brownfield sites.
• We have securitisation and funds management expertise.
• So, going forward, it looks like a great combination.
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Master-planning
“Creation of Place”
Infrastructure Delivery
e.g. Greenwich & M11 Corridor
Current Core
Business
Key Worker
Housing
e.g. First Base JV
Medium-High
Density
Housing
Bovis Lend Lease
Supply Chain
Specialist
Community
Developme nt
Land
Management
Integrated
Delivery
Expansion
Complementary
Business Models
Asset / Fund
Management
Complementary to UK Communities Strategy
Expansion
Complementary
Business Models
• I’ll just say a few words here on how the acquisition complements our
existing platform.
• Our UK Communities business is focused on the creation of sophisticated
people-friendly places.
• It is already successfully partnering with the public sector to secure long-
term land banks, such as the Greenwich Peninsula project in London.
• Where we bring value to these developments is through our disciplined
focus on master-planning and the provision of both hard and soft
infrastructure to create sustainable and desirable communities.
• The acquisition of Crosby, an established brownfield developer, provides
the opportunity to extend these skills, allowing us to participate in profit
streams from high-density built-form that we are not currently capturing.
• Over time, this may also generate new asset classes for Asset
Management and Investment Management.
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¾ Leading UK residential-focused urban regeneration business operating in
Midlands and North of England
¾ 70-year history, strong brand recognition and respected management
¾ Since 2002, focus on inner urban regeneration, with major schemes in
Birmingham, Leeds and Manchester, operating at the premium end of the sector
¾ Crosby provides Lend Lease with complementary skills to its UK Residential
Communities business
Overview – Crosby Homes
Southside, Central Birmingham Clarence Dock, Central Leeds
• So now lets look specifically at the Crosby business. Crosby is a leader in the highly
complex UK residential urban regeneration market.
• It’s got a substantial skill base and prudent approach to risk management, a strong
development pipeline and a sound business model that provides good visibility of earnings.
• It has good brand recognition (evidenced by repeat sales to residential investors) in its
core markets of the Midlands and the North of England.
• Originally a builder of executive homes, in 2002 a conscious decision was made to focus
on brownfield city centre sites, with the result that it is a more tightly managed and profit
focused business. Over recent years:
i. Staff numbers have been reduced by more than 50% from 325 to 120, focused in
three offices rather than 6
ii. Overheads have been reduced from £20 million to the current £13 million
iii. And the business is now concentrating on 14 large-scale high-density brownfield
sites with planning permission – as opposed to the 70 lower density sites under
development in 2002
iv. As a result, the business has achieved higher margins than the 15-20% found in
traditional housebuilding
v. And the focus on large scale projects has given it a competitive advantage over
smaller local competition (less able to fund these larger projects.
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Strong Management Team
Geoff Hutchinson
CEO, Crosby
Phil Darcy
Regional MD
Yorkshire
Keith Pepperdine
Regional MD
Midlands
Andrew Brady
Regional MD
North West
• Clearly, Crosby has a very strong management which is staying on board
and will continue to drive the business following the acquisition.
• The team will be led by Geoff Hutchinson, who has driven Crosby’s
brownfield regeneration strategy. He has a wealth of experience in the
sector and, before joining Crosby, was Managing Director of the largest
operating division of Beazer Homes, one of the UK’s largest home
builders until its acquisition by a competitor (Persimmon) in 2001.
• The rest of the team bring specialist skills in site acquisition, planning
approval, built-form design, project management and marketing and sales
which is essential in highly complex residential brownfield regeneration
projects.
• A strong team for Lend Lease going forward.
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¾ Total of 18 principal sites with backlog of 4,500 units remaining (including JVs)
¾ Of these, 14 have planning approval, 4 are in the planning process
¾ This represents 4 years’ backlog at current sales rate of over 1,100 units p.a.
¾ Modest land acquisitions in last 2 years in line with vendor’s cash realisation
strategy
¾ Most land acquisitions have been off-market, with success in increasing density
and optimising mix
¾ Gross profit margin at circa 25%
¾ Operating margin at circa 20%
– Traditional UK housebuilder margins are 15%-20%
¾ Land cost typically 10% of sales value
¾ Construction let under lump sum contracts – no in-house construction
Crosby Homes – Business Profile
• As I outlined before, Crosby has a number of high-quality brownfield developments.
• Today it has a total of 18 principal sites, with backlog of 4,500 units remaining
(including JVs).
• Of these, 14 have planning approval, 4 are in the planning process.
• This represents 4 years’ backlog at the current sales rate of over 1,100 units p.a.
• Crosby has remained active in the land market, both to trade on and to develop, albeit
at a lower level to ensure it retains its market positioning.
• In general, land has been acquired with planning or zoning approval (or high chance of
it); it is then optimised, and phased according to market demand. Individual site
stages take say 18 months to build and are typically part pre-sold.
– Of the backlog: 3,250 units have zoning, 1,250 are awaiting zoning.
• Land acquisitions have been largely off-market – from family trusts, non-residential
property companies / owner-occupiers and the public sector etc.
• Typically, through the approval process, Crosby has been able to optimise site yield
and realise improved returns over original feasibilities. Green Quarter is an excellent
example of this – where the Crosby team acquired a site with an initial consent for 300
units and successfully negotiated an increase to 1,300 units. I’ll touch on this more
later.
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£200m
£240m £270m
£110m
0
200
400
600
800
1,000
1,200
1,400
1,600
Birmingham Manchester Leeds & York Other
Exchanged Reserved Available Not released
No. of
units
Approx
sales value
Current Projects – Unit Numbers and Sales Values
• This slide shows the value of projects by our main operating regions.
• The big projects are Clarence Dock (Leeds), Green Quarter (Manchester), and
Navigation Street and Southside in Birmingham. Prices range from £150k - £300k.
As I said earlier, we will talk in detail about this at the management presentation. But,
to give you some colour …
• All sites will have been developed by 2010 – all but 4 by 2008.
• Of the forecast apartment sales in 2005 / 06, over 75% have been pre-sold or
reserved. Of these, 70% have been sold into the investor market.
• 15% of reservations fail to proceed to exchange, and a negligible number of
exchanges fail to complete (typically less than 1%).
• There are some commercial units in the developments and these tend to be pre-sold
to investors, with the purchaser taking letting risk.
• Historically, Crosby has sold off the ground rents and outsourced ongoing property
management.
Joint Ventures
• Crosby is involved in a number of JVs, the main one being Hungate - 727 units in York
in which Crosby has a 33% interest alongside Land Securities and Evans of Leeds -
currently in planning process.
• At this stage it is probably appropriate to talk about the UK residential market.
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UK Residential Market
¾ Market fundamentals continue
to be attractive
¾ Private rental market in UK
11% v 21% in Australia
Privately
rented
11%
Home owners
71%
Social for rent
18%
UK Household Ownership
• The important factor to note is that there is significant potential for the buy-to-let
component in the UK. The Government, as we have said, is keen to stimulate
residential investment through changes in personal super and real estate investment
funds.
• At a macro level:
– The market fundamentals are attractive
– There is a recognised need to address long-term undersupply
– The economy is stable and growing
– Unemployment is low
– As are interest rates (and they are now predicted to fall rather than rise).
• Mortgage affordability is around 40% of household income which, although above the
long-term trend of 35%, is well below the 65% of the early 90s.
• Mortgage approvals, after hitting a low in November ’04, appear to have stabilised.
• Other trend data also indicate the market is normalising.
• Before leaving the Crosby overview, I will just take you through two of their large
brownfield urban regeneration projects which will give you a sense of their
capabilities.
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Urban Regeneration – Green Quarter, Manchester
Land acquired: 23 October 2000
Planning consent received: 15 September 2001
Start on site: 6 May 2003
No. of units: 1,357
Completed, exchanged, reserved: 604
Available / not released: 157 / 596
Total project value: £237m
Average unit price: £175k
• Green Quarter is a city centre urban regeneration project, about half way
through its development cycle.
• The site was originally a largely industrial area earmarked for
redevelopment.
• It is envisaged that upon completion the scheme will provide seven
residential blocks, offices and a hotel.
• The hotel and office site have been sold to a commercial developer.
• The development is approximately 500 metres to the north of
Manchester’s main retail core and transport nodes.
• As I mentioned, through the approval process Crosby negotiated an
increase in the original consent from 300 homes to 1,300.
• Of the 157 units available as at 3 May 2005, a further 96 have now been
reserved.
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Urban Regeneration – Clarence Dock, Leeds
Land acquired: 26 March 2002
Outline planning consent: 28 February 2000
Further planning consent: 1 October 2002
Start on site: 22 April 2002
No of units: 1,149
Completed, exchanged, reserved: 881
Available / not released: 13 / 255
Total project value: £242m
Average unit price: £210k
• Clarence Dock is a 15-acre landmark mixed-use development which is
being built around an existing canal basin.
• The site, which is 1 km from Leeds City Centre adjoining the River Aire,
was acquired from the British Waterways Board and incorporates the
Royal Armouries Museum.
• Clarence Dock is under development on a phased basis, and currently
has 2 blocks completed and 4 blocks started or due to start this year out
of 8.
• Of the commercial elements, the casino and hotel have been pre-sold and
the remaining units will include retail, leisure and office.
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Strategic Fit and Synergies
¾ Enhanced management capability in mixed-use, urban regeneration based on
established brand
¾ Increased capability in brownfield development
¾ Opportunity to develop residential fund management capability
¾ Synergies with existing business in
– Site selection and master planning
– Capturing residential development profits in-house
– Construction and supply chain
– Affordable housing – First Base
• From these two urban regeneration examples, you can clearly see the
relevance of the acquisition to Lend Lease. It takes us from being
“interesting” to being a scale player in urban regeneration, and gives us a
national platform for building our relationship with Government.
• We are acquiring a solid business in its own right with an excellent record
in inner urban renewal which is increasing in prominence, strong local
authority negotiating skills and transferable skill-sets.
• As a Group, this broadens our skill-set and gives us increased capability
for brownfield development.
• Longer term, it provides synergies with our UK Communities and Retail
businesses, given increased emphasis on town centre renewal often
including mandated residential components with retail development.
• We have a staged approach to integrating over the medium-longer term,
as you will see from the next slide …
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Medium Term Short Term
Integration Strategy
Approach to integration similar to Delfin
¾ Ensure business delivers on plan
¾ Supplement existing skill-sets
¾ Identify new growth opportunities
¾ Incorporate within Lend Lease Communities
¾ Full integration
• Our integration strategy mirrors the approach taken with Delfin when it
was purchased in 2001.
• The first objective will be to ensure that business delivers against its plan.
• Over time we will supplement Crosby’s management team and skill-sets to
provide capacity for growth.
• And like Delfin, over the medium term the Crosby business will be
gradually incorporated into our broader Communities business.
• Throughout this process we will identify opportunities to:
– Share and develop master planning and brownfield development
skills, and
– Realise opportunities in construction and in the affordable housing
and vertical residential development portfolios.
• Once the UK’s mooted REIT legislation is in place, we will be in a position
to use product as a platform to build a residential, mixed-use fund
management business.
• Roger will now take you through the financial metrics.
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¾ Acquisition cost approx. £261m (A$615m)
¾ 100% funded by UK debt
¾ Solid asset backing – price 1.4 times net tangible assets
¾ Purchase price equates to around 5.4 times expected FY06 EBIT
OR approx 7.7 times P/E
¾ Strong forward earnings outlook
¾ No surprises in due diligence; supported by Savills’ valuation
¾ Completion expected July 2005
Acquisition Metrics
Presenter: Roger Burrows, Group CFO
• As Greg has said, the acquisition cost is approximately £261 million,
subject to minor working capital adjustments between now and
completion.
• We will be funding the acquisition with UK denominated debt and …
• The purchase price compares favourably with the trading and
acquisition multiples of comparable companies in the UK.
• For example, comparable transactions in the sector have been at an
average of 6.5 times EBIT versus the 5.4 times we are paying.
• In addition, the purchase price at 1.4 times NTA is also well within the
range of comparable transactions.
• As further point of comparison, the acquisition P/E compares favourably
to that of Delfin when we acquired it in 2001.
• One of the main financial attractions is that the pre-sales and committed
income stream support a strong earnings outlook for Crosby.
• As Greg said earlier, it’s complementary to our strategy for the UK
market, and it’s in a sector where we have considerable knowledge.
• Completion is expected in early July.
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¾ FY05 EBIT approx. £41m (A$96m)
¾ Pre-sales backlog secures 50% first
2 years’ GPM
¾ Pre-sales secured by 10% deposits;
default rate negligible
¾ Construction costs locked in via
lump-sum contracts
¾ Authority risk mitigated – majority of
sites have already secured planning
permissions
Crosby – Solid Earnings Outlook
34%
Exchanged Reserved Available / not yet released
Gross profit margin secured
(1 )
2006 / 07
2005 / 06
70%
(1)
Based on Crosby forecast, before adjusting for AIFRS and Lend Lease
accounting policies
34%
• Turning now to the earnings outlook, the pre-sales and committed income
stream support a strong and robust earnings outlook for Crosby.
• For example, the pre-sales backlog secures around 50% of Crosby’s
Gross Profit Margin – or GPM – for the next two years.
• As the slide shows, 70% of 2006 earnings are secured by pre-sales …
• As are 34% of 2007 earnings.
• These pre-sales are secured by 10% deposits, which historically have had
a negligible default rate.
• Our due diligence showed that both construction costs and planning risks
have been appropriately managed.
• I’ll take a few moments to outline the earnings outcomes for the Group.
.
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Impact on Lend Lease Earnings
¾ Short-term earnings affected by
AIFRS adjustments
– Pre-sold units reflected at sale
value on balance sheet post
acquisition
¾ Minor earnings accretion in FY06
post AIFRS adjustments and funding
costs
¾ Less significant AIFRS adjustment on
FY07 earnings
¾ Full earnings accretion post FY07
– Underlying Crosby earnings add 10
to 15% (net of funding costs) to
Lend Lease earnings
2005 / 06
2006 / 07
Gross profit margin secured
(1 )
Exchanged Reserved Available / not yet released
70%
34%
(1)
Based on Crosby forecast, before adjusting for AIFRS and Lend Lease
accounting policies
• Crosby generated EBIT of around £41 million for the 2005 financial year.
• However, as a result of accounting adjustments under the new
international accounting standards, or AIFRS, there will be a lower
earnings benefit for Lend Lease in the short term.
• This is due to the requirement under AIFRS to reflect the pre-sold units at
sale value on the balance sheet post acquisition, as opposed to at cost.
• For the 2006 financial year, around 70% of Crosby’s GPM will be affected
by this adjustment.
• Therefore, the net earnings of Crosby within Lend Lease’s result for FY06
are expected to be only marginally above the funding costs for the
acquisition.
• Clearly, with a much lower level of pre-sales of around 34% for 2007, the
impact of AIFRS on Lend Lease’s result will be significantly reduced in
that year.
• Irrespective of the AIFRS accounting adjustments, it is important to note
that Crosby’s cashflows – which underpin the acquisition – are
unaffected.
• Post 2007, the full earnings accretion from Crosby will flow to Lend
Lease’s results.
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Lend Lease Remains in Strong Financial Position
¾ Gross gearing moves from 17% to approx. 25% of total tangible assets
(assuming existing debt refinanced)
¾ Interest coverage comfortably above target minimum of 6 times
¾ Balance sheet capacity retained for investment in Retail and Residential
Communities businesses
• Following this transaction, the Group remains in a strong financial position.
• Gross gearing will move to around 25% of total tangible assets.
• Just as important, we expect interest coverage to remain comfortably
above our target of a minimum 6 times.
• So, in summary, it is an attractive acquisition that brings a robust earnings
stream with a solid outlook, and doesn’t constrain our capacity to
undertake further growth initiatives in our core businesses.
• On that note, I’ll now hand you back to Greg to sum up.
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Summary
¾ Acquiring a leading urban regeneration developer with solid earnings outlook and
strong asset backing
¾ Positive market metrics underpin Crosby earnings outlook
¾ Strategic extension to the Lend Lease land management model in the UK
¾ Extends vertical profit participation – land development, built-form development, high
density dwelling construction and estate management
¾ Potential supply chain synergies with Bovis Lend Lease
¾ Widens scope for Lend Lease participation in major mixed-use residential-led urban
regeneration projects
¾ Mildly earnings accretive 2005 / 2006
¾ Material earnings enhancing for Lend Lease from 2006 / 2007
¾ Group well-positioned to achieve strategic ambitions
• In summary, Lend Lease is very well-positioned in the high-growth London and
South East UK residential markets, and Crosby has strong market positions in
major regional centres.
• The acquisition supports our growth strategy, augments our existing Communities
business, enhances our skill base and broadens our offering to the UK market.
• Crosby has a strong brand and is a clear fit with our Master Planned Urban
Communities business, increasing its scale and footprint.
• It is a leader in the highly complex UK urban regeneration market.
• It has a substantial skill base …
• A prudent approach to risk management …
• A strong development pipeline …
• And a sound business model that provides good visibility of earnings.
• The UK has a stable and growing economy.
• There is a recognised undersupply of new housing, and the Government has
introduced initiatives which support residential investment and enhance home
affordability.
• And we are comfortable with the market dynamics and fundamentals.
• Thank you for your time.
