Listed in 2019, Lendlease Global Commercial REIT primarily owns two leasehold mixed-use properties in Singapore (313@somerset and Jem) and one freehold office asset (Sky Complex) in Italy. Despite the REIT making strides in its recovery from the pandemic, several unitholders expressed dissatisfaction with the lackluster performance of its share price during the meeting.
Here are seven things I learned from the 2023 Lendlease Global Commercial REIT AGM.
1. Gross revenue doubled from S$101.7 million in 2022 to S$204.9 million in 2023, while net property income (NPI) also doubled from S$75.5 million to S$153.9 million over the same period. The better performance was due to full-year contribution from Jem and positive rental reversions.
2. On the back of rising interest rates and additional loans drawn down to acquire Jem, net finance expenses tripled from S$15.8 million in 2022 to S$50.7 million in 2023. As a result, the REIT’s distribution per unit dropped from 4.85 cents to 4.70 cents over the same period. About 61% of the REIT’s loans were at floating rates in the latest financial year.
3. The REIT’s Singapore assets are its crown jewels as they contributed to 87.8% of gross revenue and 85.4% of NPI in 2023. Retail retention rate stood high at 82.4% in the most recent financial year. Tenants offering essential services contributed around 58% of the retail gross rental income, indicating the resilience of the retail assets even in the face of economic downturns. Tenant sales in 2023 for the REIT’s retail properties exceeded pre-pandemic levels as shoppers returned to physical stores. Shopping malls continue to be relevant in post-pandemic amid the improved retail market sentiment.
Retail rental reversion for Q1 FY2024 reached 16.3%. According to CEO Kelvin Chow, the growth was partly due to rental rates being renewed at the ‘lower end of the tier’ two to three years ago during the pandemic. Additionally, the growth in tenant sales provides the REIT with the opportunity to raise rents beyond the built-in escalation of over 3% annually. Notably, there are no significant overdue payments from retail tenants.
Due to the pandemic, the construction of the multifunctional event space next to 313@somerset experienced delays and is set to resume by the end of 2023. The space will feature anchor tenant Live Nation and provide visitors with experiential events and live performances along the Orchard Road shopping belt. The development of 10,200 square feet of retail space, comprising 4% of the gross floor area of 313@somerset, is still pending.
4. Gearing stood at 40.6% — or 50.0% if inclusive of perpetual securities — in 2023. A few unitholders were worried about the REIT’s gearing level as perpetual securities are sometimes viewed as debt rather than equity. The CEO is comfortable with the REIT’s current gearing level since its Singapore assets are performing amid a tourism recovery and the return of office crowds. He added that the gearing level is on par with or even better than some of its peers. Options including fundraising exercises and asset recycling may be considered in the future to reduce its gearing. The REIT secured a €300 million unsecured sustainability-linked loan with a five-year term to refinance its debt maturing in 2024. The CEO emphasized that the unsecured banking facilities were, in part, a result of the bank’s confidence in the REIT.
5. Some unitholders expressed dissatisfaction with the 2022 private placement and preferential offering conducted to acquire the remaining interests in Jem. They linked the REIT’s high gearing and lagging share price performance to these actions. While the issue prices of the placement and offering represented acceptable discounts of about 9% and 10% to the volume-weighted average price at the time, the high gearing emerged as a more substantial concern. Some unitholders are also wary of potential dilutive fundraising exercises in the future.
6. The REIT’s office properties in Singapore and Milan are leased to reputable tenants, specifically the Singapore Ministry of National Development until 2044 and Sky Italia until 2032, respectively. The office properties provide income visibility to unitholders as the office weighted average lease expiry is long at 14.6 years by gross rental income.
|Weighted average cost of debt||1.69%||2.69%|
|Interest coverage ratio||9.2 times||4.2 times|
|Weighted average debt maturity||2.8 years||2.1 years|
|Weighted average lease expiry by gross rental income||5.5 years||5.5 years|
The annual rent escalation of the Milan asset is tied to the consumer price index. The CEO considers Sky Italia a good tenant with good credit ratings. The tenant could terminate the lease in 2026 but will most likely stick with the current lease as the tenant has invested a lot in the building according to the CEO. The existing rental rate of €200 per square metres is about 40% lower than the market price in Milan.
7. The REIT currently owns a 10% interest in Parkway Parade and may increase its stake in the future. The suburban retail mall helps the REIT diversify its income sources and will be connected to the upcoming Marine Parade MRT station in 2024 via a proposed underground pedestrian linkage. The expansion gives the mall opportunities for more asset enhancement initiatives.
The fifth perspective
While Lendlease Global Commercial REIT owns good assets in Singapore and Italy, its relatively high gearing ratio in the current interest rate environment is a risk. Additionally, the REIT faces concerns due to its relatively brief listing history and limited track record. I’d personally prefer to sit on the sidelines and access how this REIT performs over the next few years.
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