Lendlease Global Commercial REIT (LREIT) is a relatively new REIT that listed on the SGX in October 2019. At the moment, the REIT owns just two properties in its portfolio – 313@somerset, a prime mall in Singapore; and Sky Complex, a property comprising three grade-A office buildings in Milan, Italy. As of 30 June 2020, the properties have a combined value of S$1.4 billion.
LREIT debuted to much fanfare back in October when its share price jumped as high as 6.8% from its IPO price of 88 cents on opening day. LREIT also projected a distribution per unit (DPU) of 5.29 cents for FY2021, which works out to a distribution yield of 6.0% based on its IPO price.
However, COVID-19 has thrown a spanner in the works when the pandemic hit a few months after LREIT’s IPO. How will LREIT respond to the challenges? I attended its recent annual meeting to learn more. Here are seven things I learned from the 2020 Lendlease Global Commercial REIT AGM.
1. Gross revenue and net property income (NPI) for FY2020 was S$55.5 million and S$40.3 million respectively. NPI fell below the forecast of S$47.7 million. This was mainly due to the pandemic and the COVID support measures and rebates that LREIT provided to its tenants at 313@somerset. NPI was cushioned by stable rents from Sky Italia which remained fully occupied during the pandemic.
2. Distributable income and DPU for FY2020 was S$35.7 million and 3.05 cents respectively. Based on LREIT’s share price of 60 cents (as at 2 November 2020), its yield is 5.1%. This is relatively lower than comparable retail/commercial Singapore REITs at the moment. The management gave no details whether FY2021 DPU will achieve the forecast of 5.29 cents, but they remain committed to distributing 100% of distributable income to unitholders.
3. LREIT’s gearing ratio stands at 35.1% as at 30 June 2020. The REIT has S$545.3 million in gross borrowings, all of which is hedged at fixed interest rates. Weighted average cost of debt is 0.86% p.a. and weighted average debt maturity is 3.1 years. LREIT has no refinancing requirements until FY2023.
4. As of 30 June 2020, 313@somerset and Sky Complex have occupancy rates of 97.8% and 100% respectively. Portfolio weighted average lease expiry (WALE) is 9.7 years based on net lettable area. However, this is skewed by the long triple-net lease at Sky Complex which is entirely leased to Sky Italia for a term of 12 + 12 years with a lease expiry in May 2032 (assuming that Sky Italia does not exercise its break option in 2026). WALE at 313@somerset is much shorter at 1.9 years, which is typical of retail leases in Singapore.
Sky Italia is LREIT’s largest tenant and contributed 30.3% of FY2020 gross rental income which represents a sizable concentration risk. However, it is unlikely that Sky Italia will default on its lease agreement as it is a high-quality tenant and a subsidiary of global telecommunications conglomerate, Comcast.
5. Shopper traffic and tenant sales at 313@somerset have recovered to 60% to 70% of pre-pandemic levels. Despite the hit caused by COVID-19, occupancy rate at the mall remains high and tenant retention is healthy at 86.6%. In our opinion, 313@somerset is likely to remain successful due to its prime, high-traffic location and well-curated tenant mix. Watch our YouTube roundtable discussion as we discuss how Singapore retail REITs can survive or thrive in a post-COVID world.
6. LREIT was awarded the tender to redevelop Grange Road carpark into a multifunctional event space which would include an independent cinema, hawker stalls, and ad hoc events. The redevelopment will cost a relatively modest $S10 million and is targeted to complete by the first half of 2022. The site lies right beside 313@somerset and the management views that the project will enlarge and solidify LREIT’s retail presence in the Somerset area.
Additionally, 313@somerset’s plot ratio was increased from 4.9 to 5.6, unlocking a potential increase of up to 1,008 square metres of space for the mall. The management has identified potential areas for expansion but have not released any details yet.
7. LREIT’s sponsor, Lendlease Group, is a multinational real estate conglomerate headquartered in Sydney, Australia. Lendlease Group has a presence in 17 cities in Asia, Europe, and the U.S., and has a been involved in landmark projects including the Sydney Opera House, Petronas Towers, and the Statue of Liberty.
In Singapore, Lendlease Group is involved in 11 projects of which five are retail malls including 313@somerset (fully owned by LREIT), Jem (where LREIT has a 3.75% effective interest through Lendlease Asian Retail Investment Fund 3), Parkway Parade, Paya Lebar Quarter, and PoMo. Lendlease Group’s pipeline of projects present possible acquisitions for LREIT. However, LREIT has not given any indication of an acquisition at this time.
The fifth perspective
Due to its recent listing, Lendlease Global Commercial REIT doesn’t have a long-term track record for investors to evaluate. But the REIT is backed by a strong sponsor and owns two high-quality properties in its initial portfolio. At the same time, the COVID-19 situation remains fluid and investors may prefer to monitor LREIT and its performance in the meantime.
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