CNBC Transcript: Steve McCann, Group CEO, Lendlease 

Below is the transcript of an interview with Lendlease Group CEO Steve McCann. The interview will play out in CNBC's latest episode of Managing Asia on 5 October 2018, 5.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.

Christine Tan: So Steven, what are you doing differently this time round to make sure the company doesn't suffer the same pitfalls as it did in the past?

Steve McCann: Thanks Christine and thanks for having me on the show. Lendlease historically has always had a development, construction and funds capability from way back in the early days in the organization. But we grew as an international builder in a number of countries. We have now retreated to 8 countries. We're in a number of cities that we think about as 'gateway cities' and our strategy is really around what is our competitive advantage and what are the best cities for us to deploy that competitive advantage and when. And that's really around being an integrated provider of large place-making solutions and we focus on the urbanization of major cities around the world. There are a number of large precincts which require mixed-use capability and scale, and that plays to our competitive advantage.

Christine Tan: What lessons have you and your entire organization learnt from the company's past mistakes?

Steve McCann: We're very disciplined on where we establish ourselves and how we build up our capability. We have to be in markets where we can build up a competitive advantage, where we can operate safely, where we can operate profitably, and where we can operate within the values of our culture. So we have a very strong value set as an organization. We've had real challenges with safety previously, we've done a lot of work to improve our track record there, in fact we went from an average of 7 or 8 fatalities a year in our business back when we were in 30 or 40 countries, and now we've went recently for four years without a single fatality. We've had a couple of fatalities recently in New York, which is very difficult for us to deal with, but we're very focused on making sure we minimize the risks of our business and we pursue high quality product within our culture set.

Christine Tan: And safety is something close to your heart I hear.

Steve McCann: It's very important. I think, you know, as a CEO of a large business, one of the hardest things to do is to deal with fatalities or harm being cause to people working at, or visiting your projects. We have 13 thousand employees and I think it's my responsibility and the senior management team's responsibility to look after their welfare, so we think that's a very high priority for the business and it has to be accepted by everybody.

Christine Tan: You know when Lendlease first started out, it started as an engineering-construction company. Then you went into urban regeneration projects, retirement villages and fund management. How has the company's business model evolved over the years? And what sort of giant are you trying to build under your tenure as CEO?

Steve McCann: We sat down ten years ago when I became the CEO to have a look at our strategy and you might remember that was right in the middle of the financial crisis. So I think everybody was reconsidering the way forward.

Christine Tan: It was a tough time.

Steve McCann: It was a tough time. We were fortunate, we had a pretty strong balance sheet then, so we had the opportunity to re-invest some capital in places where there was probably limited competition. We took advantage of that, what you do in real estate comes down to getting the market right, not just location but also timing. So we did a lot of work on what the key drivers for our strategy would be into the longer term. We make very large long-term decisions. So for us, it's about one, increasing population density and the urbanization challenges that come with that; two, the aging demographic which is a big driver of the real estate markets internationally; and three, sustainability. Environmental sustainability and social sustainability are subsets of that.

Christine Tan: Today, you have over A$70 bn worth of urbanization projects in Asia, Europe and the U.S. How do you go about picking the projects you want to get into?

Steve McCann: It's very selective. We had a great year last year, we added about A$20 bn in value to our pipeline. We won a number of very significant projects in London and also in Milan. And what we're looking for is projects that require place-making capability. Our vision statement is to create the best places, we fundamentally believe that that is how you drive the best value...

Christine Tan: You want to be a game changer.

Steve McCann: We do. We think that there are challenges in most cities around the world. There are some interesting statistics, it's going to take a new city the size of London once every 6 weeks for the next 35 years just to absorb population growth. How do you do that when most cities already have density challenges, traffic congestion, pollution, social issues? So increasingly, we see governments moving towards large scale precincts where they work in partnership over not a two- to three-year journey, but a 10- to 15-year journey with a partner. For us, it means we're not spending a lot of capital up front, we're working over a long period of time and we're bringing in third-party investors to invest in the project once they believe in the vision that we're trying to create. So it's a great business model, it's very resilient, and it means we're not as exposed to the cyclical factors that most real estate businesses have.

Christine Tan: You have about 18 projects now in 10 gateway cities. Are you looking to add more to your portfolio?

Steve McCann: We will. We're bidding on a few projects as we speak. We don't need to chase deals, obviously, with a pipeline of that sort of scale. But scale does have its own rules as well, some of the activities within our business, some of the initiatives around infrastructure and around technology are only possible because of the scale of precincts that we manage. We have created our own embedded utilities in some of our projects. You can't really do that with single buildings, you need to have control of large master-planned precincts. So there's a lot more we can do. The limiting factor for us is people, obviously, it's not capital, there's a lot of capital around looking for a home. There are a lot of products that need to be created. It's really about what are our own constraints around the ability of our people to deliver good outcomes.

Christine Tan: More than half of your urbanization pipeline now is in Europe. Where will your future new projects come from? What are you eyeing?

Steve McCann: Well firstly in the US, we've been prepped for the last five or six years, increasing our development capability. There are a couple of very large projects there that we're working towards now, so we're hoping in the not-too-distant future, we'll enter the U.S. backlog. In Asia, we are in Tokyo as a niche player in the telco towers space. We're looking to grow that business more broadly. There are some urbanization opportunities in Tokyo that we're interested in. We spent a bit of time on the ground in India, we have a long term view on India. We are in China, and China is somewhere where we've been a builder for about 25 years - primarily for multi-nationals and pharmaceutical companies. We've just started our first senior living village in China. We're going to concentrate on that as a niche in that market. Obviously, a lot of demand for the right product, we'll be working hard to make sure that we deliver the right product.

Christine Tan: Well, Sydney's Barangaroo was your first big step towards landmark regeneration projects. To what extent are you using that as an example to win over other city projects?

Steve McCann: Barangaroo, we're very proud of obviously. It's in our backyard, so it was important for us to get that project right. And that was a very large, disused piece of reclaimed land. It's been a fantastic success. The commercial precinct has traded very well. The retail precinct is the highest turn over precinct in Australia today. So, it's been a tremendous success really from day one. What it enables us to do is to bring our clients, our government partners and stakeholders from everywhere around the world, to actually show that we deliver what we say we're going to deliver. And I think that's the critical thing. When we bid on that project back in 2009, we committed to deliver a carbon-neutral precinct and today, it's the largest carbon- neutral precinct in the world. And that's been a tremendous success, it was well above what the government was actually asking for. And when we committed to that back in 2009, that was a brave step. But our teams delivered a tremendous result, they've worked really hard to deliver that result, so it's very pleasing that we're able to showcase that project. There are others though, in that 10 year time frame that are now well and truly established like Elephant Park in London and the International Quarter, Stratford also in London. So we have a number of projects now where we can demonstrate a track record of delivery as opposed to just a vision. And I think that makes a big difference.

Christine Tan: You know when it comes to urbanization, you're often dealing with governments, city authorities, people and their homes. And in some of your projects like Elephant Park and in Barangaroo, to some extent, there has been some unhappiness, even opposition when it comes to their local communities. As CEO, how do you deal with these specific challenges?

Steve McCann: And that is a big challenge in what we do. I think the reality is in every project, given the scale of which we operate, there are always multiple stakeholders. We do our best to engage with all of the stakeholders, we do a lot of work prior to bidding on these projects to understand the local requirements, the local sentiment, political issues. We can't always satisfy every stakeholder. We do our best to produce a great product so that when people look back, they can say that, you know, we did a good job in looking after the interest of the different stakeholders, whether that's relocating somebody to another home, a quality home, or whether that's driving regeneration of the whole precinct. It is a challenge, it always will be a challenge, but I think with urbanization, given the density that's being absorbed into major cities around the world, it's a challenge that needs to be dealt with. And I think provided you engage properly and have the right ambitions and objectives, then you can navigate through most of that.

Christine Tan: So at the end of the day, you just have to accept that you can't please everyone?

Steve McCann: You can't. But you can engage properly and you can genuinely listen to people or you can just get on with it and try to make money. And we try to really engage properly and have a vision that does the best to achieve an outcome that everybody can be comfortable with, to the best of our ability.

Christine Tan: As CEO you've also put in place a capital-efficient structure. Where instead of putting all your development risks onto your own balance sheet, you're actually bringing in investment partners to share some of those risks. How are these partnerships coming along?

Steve McCann: Very well. It's a critical part of our business. So we're a business with a market capitalization of A$ 12 billion, we have a A$70 billion development pipeline to build over the next 10 years or so. We clearly don't have the capacity to do that ourselves. So, we rely on having very strong relationships with a number of large investors internationally and they've supported us very strongly, and they've done quite well out of that relationship. They've invested in high quality product and they've made very good returns. So, we know well in advance of what we go after, who we think the preferred investors will be.

Christine Tan: How do you know that?

Steve McCann: We have regular dialogues with them, you know, we have a team that is very close to their teams. We spend a lot of time in different markets around the world, understanding their drivers. Today we have about 150 international investors in our portfolio, we have A$30 billion of funds under management. If you look at our pipeline, there's at least another 30 that will have to come through and fund that pipeline. And I think for investors, they have a portfolio approach to risk and investment and we do as well. So we're quite aligned in the way that we think about risk during a cycle and how best to mitigate that risk. So I think we've got a lot of synergies when it comes to businesses we're in.

Christine Tan: Overall, things seem to be paying off because the full-year results that just ended in June show that construction and profit margins are up. How do you see this year going?

Steve McCann: Pretty confident about both the short- and long-term. We think about our business in three components: developments, investment and construction. The developments and investments businesses are delivering returns above the top end of their target range at the moment. And if we take a disciplined approach to where we allocate capital, financially, there's a fair bit of growth embedded in the pipelines that we've already secured. Today, 59% of our capital is in Australia, about three years ago it was 80%. So, we've very proactively been looking at opportunities outside of our home market. And that's really just a reaction to the relevant opportunities that are there, given where we are in the cycle in Australia.

Christine Tan: Do you think you could improve your profit margins?

Steve McCann: We're certainly aiming to yes.

Christine Tan: In which markets?

Steve McCann: Scale does have its own rewards and I think as we get to a position of controlling significant master plan precincts, our investors will continue to support us. We'll be able to reduce the amount of our own capital but still keep growing. Which means we'll be getting a higher profit margin as we go. I think that can apply uniformly across our business, there are different return requirements depending on different assets but overall, it averages out to not much difference, depending on where you are, there's not a huge variation in the...

Christine Tan: Do you have a profit margin that you want to hit?

Steve McCann: We do. We aim to deliver between 10 to 14 percent return on equity across our business. We're delivering around 13 at the moment. So, we're doing pretty well. We'd like to get above the top-end of the range and I think our shareholders would like that too.

Christine Tan: Let's talk about China because you recently raised eyebrows by being the first foreign company to actually break into China's aged care market. What does it mean to actually build for the elderly, how different is it from normal developments?

Steve McCann: The challenge with the aging demographic in a lot of countries in China and Japan is that you have a very large and exponentially increasing proportion of the that is looking for somewhere to retire and somewhere to age in a nice community sort of environment. Typically, the price for those retirement homes is lower than the market price point. So, a lot of developers are chasing attractive high product and not really putting the time and capital into the retirement space. So we've had some very good conversations with provincial governments in China about what they're trying to achieve, we're the largest operator of senior living villages in Australia, so we have a very established operating model, good technology and good platform. And we think we can scale it up. The first village is in Qingpu, Shanghai, it's 900 homes, we'll start selling about this time next year. So it's a pilot, we're not getting ahead of ourselves. We take things a step at a time, but clearly the opportunity in Asia is very significant if we can prove up that model.

Christine Tan: Unlike your other projects, you're going it alone in China. Were you not able to find a joint venture partner? Or are you still looking?

Steve McCann: Now, I think in this particular space, because it's such a niche product, from our perspective, it is a pilot. Over time, if we get to the scale we'd like to get to, we'll expect to bring in investors. In fact, there is interest from Chinese investors to back us if we get to a product of scale. So over time, we would bring in partners. But in terms of controlling the quality of the precinct we're trying to establish today, I think it's important that we start on our own. We could work with local partners, but we all have different visions as to how these things should be done. We find it better, in a development, to be in control of our own destiny.

Christine Tan: Are you looking for more aged care segments to get into in China? Are you looking to add to your portfolio in China right now?

Steve McCann: We are. We're focused on Shanghai for now. We manage 15,000 homes in Australia, we're the largest manager of senior living. That's a drop in the ocean in Shanghai, let alone China. So the scale of what is there and the need, the challenges, is very significant. So we'll start with Shanghai and if we go well, we'll expand beyond there.

Christine Tan: China's aging population is growing so fast. Talk to us about the demand you see for retirement homes in China. What's the potential like? What are you seeing?

Steve McCann: Yeah I think the biggest challenge for China today is that a private developer like us, and I think that we have a different set of objectives to locals, we're motivated to build our brand and build our market position there. But the affordability for people buying our product is a very limited percentage of the population. The challenge for China is, across the broad population, it's very difficult to solve that challenge without government subsidized land offerings because market rates for land really price buyers out of that market. That's a similar challenge in a lot of markets around the world. There actually isn't a large international player offering this kind of product on a global basis today. So there's a gap there that someone will fill over time. We do build retirement villages in the US, in the UK, in Australia and now China. In Australia, it's the only one we own on our balance sheet today, but over time, there is an opportunity to expand that. But it is going to take a lot of cooperation with governments.

Christine Tan: Do you think you can be a big player in this space in China?

Steve McCann: I think it will come down to the success of our first product and then the appetite for governments to continue to push this product. The Central Government of China has a big mission ahead of itself to deliver it. There is an attraction of international brands in China, but there's also a lot of competition. There are a lot of Chinese developers, so we're only going to succeed if we do a great job, and that's certainly the aim.

Christine Tan: Let's talk about your younger days. You were just 18 when you were introduced to horse racing. Then you took the job of a bookmaker's clerk in the racing circuit. Was that when you got that early training to manage and assess risk from?

Steve McCann: Yeah, I always like to say that I learnt more there than I did in university which is probably not untrue. I think horse-racing has been, for some reason, my passion that I think my grandfather caused me to have. He was a jockey for a period of time. And when I was at university, I grew up in Adelaide in a working class suburb. My parents didn't have the capacity to put me through university so I had to pay my own way. So I went and got a job as a bookmaker's clerk to basically pay my way through university.

Christine Tan: How did you do?

Steve McCann: Pretty well. I didn't spend much time in university, I spent more time at the races but I learned a lot so that's the main thing.

Christine Tan: So if I was to throw any number at you right now, you could quickly add it up easily?

Steve McCann: I used to be very good at that. I don't do it quite as often these days, but yeah, I can do that.

Christine Tan: You're 53 years old, born in Adelaide, Australia, worked as an investment banker and a lawyer before joining Lendlease in 2005. Spent a few years in some senior positions within the company before being made CEO in 2008. And you are now in charge of 13,000 employees within Lendlease. How would you describe your leadership and your management style? What are you like as a boss?

Steve McCann: I think people would have varying opinions on that perhaps. But my approach, really what I try to achieve, I think it's about balance. You've got to get the balance right between collaboration and decisiveness. So, as the leader of a large organization, essentially the final decision rests with me, and you have to be prepared to make that final decision. And sometimes that can be, obviously, you know, risky and it can be challenging. But unless you're prepared to take that accountability, then you really can't run a public company. The more input I get, the better. I like a lot of data, I like to listen to a lot of people, before I make that decision. And we do have a relatively consensus-based management approach. But there's always got to be a final decision, and that's my responsibility. So I try to get that balance right where people feel like their input is really valued and it is. But when they need someone to place the bet, so to speak, I'm prepared to do it.

Christine Tan: Do you ever get it wrong?

Steve McCann: Yeah yeah. We always...

Christine Tan: Does it happen often?

Steve McCann: Hopefully, not that often. You know, we've made some bad decisions in the past, I've made some bad decisions in the past. I think everyone gets it wrong (sometimes). I think as we move forward, our core business model is working very very well, we're becoming a little bit more entrepreneurial. We're placing some bets in some technology initiatives and some other things. And I think it's important that we talk about this, you can't have a fear of failure, you can't have a culture where people are scared to fail. You sometimes have to fail to improve. The key is that when you do, learn from it and don't repeat it. And provided you do that, I think it's worth taking risks, and without risks, you really can't succeed.

Christine Tan: As CEO of Lendlease for the last 10 years, I hear you play a pretty mean poker game when it comes to negotiating a good deal. Is that true?

Steve McCann: You need to hold your cards close to your chest sometimes, and I think it really comes down to being clear about what the end game looks like. And there are many things that get in the way, and many changes of direction that you have to be prepared to accept over time.

Christine Tan: So what's the best way to get a good deal? What's the best way to pin down a good deal?

Steve McCann: Well firstly, know more than the other person. So we do a lot of homework, we think a lot about what we're trying to achieve and I rely very heavily on some really good input from some great people. So I like to, when we're making our decision, have as much information as possible, but then, it's about having clarity of what the strategy is. And we're pretty clear on where we're trying to get to.

Christine Tan: And finally as CEO of Lendlease, what's your ultimate ambition for the company, what sort of legacy do you want to build under your tenure as CEO?

Steve McCann: When I first took over as CEO, I read a book called "Good to Great" which was a well known business book by Jim Collins, and one of the first parts of that book talked about great CEOs thinking about their succession planning from day one. And what was the legacy going to be from day one. And I've had that in the forefront of my mind from day one. So I'd like to be able to walk away from Lendlease knowing it's in great shape, that the decisions we made today are going to support the company for a long time to come. And a lot of the decisions we make are very long dated projects so you need to have that long-dated mindset to be successful.

Christine Tan: Steve, thank you so much for talking to me.

Steve McCann: Thank you.

ENDS

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