Lendlease reports loss, points to new UK residential defect law

Dive Brief:

• Australian developer and contractor Lendlease reported a AU$141 million ($98.2 million USD) loss for the first half of 2023, a result largely attributed to a U.K. law that forced it to shell out hundreds of millions to remediate residential properties.
• Inflation and supply chain struggles continue to be concerns for Lendlease’s construction arm, though the $AU9.6 billion in backlog revenue (down 9% from the period before) is in line with the contractor’s target range for growth diversified by client, sector and geography.
• Construction revenue hit AU$3.7 billion for the half-year period ending Dec. 31, a 14% increase from a year prior. “In the construction segment, we continued to do a good job managing supply chain and inflationary risks and delivered a steady result given the challenging backdrop,” CEO Tony Lombardo said during an earnings call Monday.

Dive Insight:

Most of the backlog revenue is in Australia, though Lendlease has AU$2.9 billion worth of work in the U.S. That’s lower than usual, “primarily due to a pause in projects coming to market during the pandemic and selective bidding on new work,” Lombardo said.

Last week, both Jacobs and AECOM reported growth in their earnings, citing U.S. government funds flowing into the project pipelines.

After poor performance and leadership changesLendlease went into “recalibrating” mode during fiscal year 2022, Lombardo said. The company is now in the second year of a five-year course correction.

“Our focus is now on executing the strategy in order to return the group to sustained profitable performance,” Lombardo said.

Changing U.K. laws

Lendlease’s AU$141 million statutory loss after tax largely stemmed from changing U.K. laws surrounding remediating residential properties looking back 30 years. Under the Defective Premises Act, the British government has moved to extend the period of defect claims for residential buildings from six to 30 years. The new law also covers changes to building safety regulations of completed blocks.

Lendlease was forced to sign a contract and take a AU$200 million provision against potential liabilities to remediate residential properties to avoid facing significant trade restrictions in the U.K. market.

Lombardo said most of the liability was related to buildings developed by Crosby Group entities, which Lendlease acquired in 2005. The developer expects cash expenditures from the provision to be spread over the next five years.

Safety and outlook

Inflation and supply chain struggles will continue to steepen Lendlease’s uphill climb, and are impacting the contractor’s confidence in the future.

“While these risks continue to be proactively managed, their persistence may impact performance,” Lombardo said.

He added that he expects construction earnings in 2023 to be on the lower half of the firm’s 1.5% to 2.5% outlook range.

In September, 46-year-old Pape Khoule died on a Lendlease jobsite in Brooklyn, New York, when a 2,000-pound piece of equipment fell on him.

During the earnings call, Lombardo offered his condolences, before stating the site was “under subcontractor management” at the time of Khoule’s death.