“Blooms of mould and lead paint … infestations of snakes and cockroaches and dangerously faulty window screens”.

Lendlease has come under fire in the US from the families of soldiers living in its military housing at Fort Hood for “abysmal housing conditions”.

The irony is that this is the same military housing complex which Lendlease had just doubled in valuation, a feat of financial alchemy which must surely call into question Lendlease’s accounting practices across the whole business.

Remember the old magician’s trick, sawing in half the woman in the box? This is the magician’s equivalent of really sawing the woman in half.

But it’s no accident. This doubling in valuation for an asset which is clearly in trouble has been taken through the P&L. That is, Lendlease books its asset revaluations as profits, profits which drive its share price higher and, with it, executive salaries.

The Fort Hood imbroglio is a telling metaphor. Asset valuations are going through the roof while performance is going through the floor.

The company jacked up the valuation of Fort Hood by 83 per cent, from $102.8 million to $187.9 million –  without providing any details of variables used – in 2017/2018 and has subsequently pushed it through $200 million.

In an investigation of Lendlease’s financial statements here last July, it was revealed that the bulk of the company’s profit came from asset revaluations, asset reclassifications and asset sales, not from cash earnings.

What lies beneath – how Lendlease put a shine on its numbers

We found that, over the preceding eight years, the company had booked $2.5 billion in non-cash profits. And in another escapade of financial bravado, management had sold the company’s retirement village assets into a joint venture with a Dutch pension fund, then promptly borrowed $400 million from the joint venture and kicked off a $500 million share buy-back.

That day in July, the stock was changing hands at $19.99 a share. Six months later, Lendlease shares plummeted after an earnings downgrade to the construction division. They closed yesterday at $12.55 a share.

What other magic is yet to be unveiled? The rub for the management team led by Steve McCann is credibility. There is a vast schism which lies between the manicured messages Lendlease delivers to its investors and reality, and this is no better enshrined in the Fort Hood saga.

“Over the last five days, Fort Hood leaders have heard a steady stream of complaints regarding mould, pest infestations, unsafe windows and sometimes months-long delays in maintenance work by the Australian firm Lend Lease, which manages the post’s 5,500 family homes.”

Lendlease responded with a statement, which we have appended below, saying the Military Housing Privatisation Initiative has been a “very successful program and we are proud of our achievements … we recognise and acknowledge there is also room for improvement”.

The Australian Tax Office would also acknowledge privately that there is room for improvement. And it’s not just the fact that, despite its billions in government contracts, Lendlease has paid almost no tax in Australia for years.

LendLease time to fess up

It has paid more income tax overseas than it has paid in Australia. Yet, the more fundamental reason the revenue authority might have a gripe is because Lendlease has been double dipping in its tax deductions. When the ATO finally enforces the relevant tax ruling regarding the group’s retirement business, it may affect six years of financial reports and involve $300 million in payments.

Now may be a good time to “put the new broom through” Lendlease. Management has been there for a decade and its auditors KPMG would appear to be completely captive (see the following story) having been there as the supposed “gatekeeper” doing the company audit for more than half a century.

This is the quintessential case for audit rotation. But the more telling message is that Lendlease has just been too damned tricky and is taking on the character of the late Babcock & Brown.

Lend Lease: double dipping and Dutch tripping

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Lendlease response to questions over Military Housing

Lendlease, along with Balfour Beatty, Corvias, Hunt and Lincoln appeared before the Senate Armed Services Committee in February to discuss ways to improve the Military Housing Privatization Initiative.

While the Military Housing Privatization Initiative has been a very successful program and we are proud of our achievements, at Lendlease we recognise and acknowledge that there is always room for improvement.

We will continue to focus on enhancing the quality of life for all families who live on our installations and we remain committed to working with the community, government and military to develop new initiatives to improve performance.

Valuations

Lendlease’s Military Housing Projects Initiative is classified in Other Financial Assets and carried at fair value through profit and loss. The revaluation taken in FY18 reflects the following factors:

The development phase is now complete which means the assets are now stable in terms of cash flow, tenancy and overall operations.
We have taken a portfolio approach to the investment and had its market value assessed by an independent third party. Recent comparable transactions by other operators also informed this independent assessment.
Revaluations are recognised through our profit and loss statement in line with accounting standards.
The investment value reflects a stable and recurring cash flow stream the portfolio generates over a long period.
Regarding our retirement villages, Lendlease remains satisfied with our tax treatment of that business.

As a listed entity, we’re aware of and meet our continuous disclosure obligations.

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