Lendlease Global Commercial REIT has announced an SGD perpetual bond offering at an initial price guidance of 4.35% and it seems to be at a good price.

Tan Chu Ren Published on 27 May 2021

Singaporeans and tourists alike would surely know the name of 313@Somerset – one of the most prominent malls at Orchard Road. The owner behind the mall – Lendlease Global Commercial Reit (“LREIT”) was listed on the Singapore Exchange on 2019 and now they are tapping the bond market with a new perpetual note.

About the bonds

These subordinated perpetual securities are issued by LREIT under the SGD 1b multicurrency debt issuance programme dated 8 Jan 2021. The net proceeds will be used for the refinancing of existing borrowings, financing of potential acquisition and investment opportunities, general working capital and capital expenditure requirements and the general corporate purposes of the LREIT group.

The bonds are first callable in Jun 2026 and will reset to the prevailing 5Y SGD swap offer rate (“SOR”) and initial credit spread if not called. The perps are callable every six months thereafter. Any deferred distributions are non-cumulative and the securities have embedded dividend stopper features.

About LREIT

Other than 313@somerset, LREIT also fully owns Sky Complex – an office area in Milan comprising of three office buildings. As at 31 Mar 2021, Sky Complex has an occupancy rate of 100% and a weighted average lease expiry (“WALE”) of 11.1 years. Sky Complex is also expected to benefit from the transformation of the Milano Santa Giulia district where they are located. The 2026 Winter Olympics will be held there and there are plans of developing an urban park and residential area in the district.

LREIT also holds a 5% stake in Lendlease Asian Retail Investment Fund 3 Limited (“ARIF 3”), which holds a 75.0% indirect interest in Jem. They are also developing Somerset belt, a youth precinct for multiple dedicated event spaces which is expected to be operational in the first half of 2022.

LREIT is managed by Lendlease Global Commercial Trust Management Pte. Ltd., an indirect wholly-owned subsidiary of Lendlease Corporation Limited which is the Sponsor. The Sponsor is part of the Lendlease Group.

Operating results

In the six-month period ended 31 Dec 2020 (“1HFY21”), the Singapore government relaxed its circuit breaker measures which helped improve revenue from 313@somerset. LREIT also benefited from stronger EUR/SGD rates resulting in higher revenue from Sky Complex. As such, gross revenue and net property income (“NPI”) increased by 3.2% YoY and 1.6% to SGD 41.6m and SGD 30.4m respectively. However, due to net foreign exchange loss of SGD 14.6m, LREIT recorded a profit before tax and change in fair value of only SGD 5.31m, a decline of 79.2%.

As LREIT was publicly listed on 2 Oct 2019, financial results for the 6-month period ended 31 Dec 2019 (“1HFY20”) were annualised based on the actual results from 2 Oct 2019 to 30 Jun 2020 (273 days) pro-rated to 366 days, deducting for the actual results from 1 Jan 2020 to 30 Jun 2020.

Credit and liquidity profile

However, the new wave of COVID-19 infections in Singapore will affect LREIT’s FY2021 results. The LREIT group has SGD 46.4m in cash and cash equivalents with their first major debt of SGD 99.3m expiring on 2 Oct 2022. Thus, they should have enough liquidity to tank through the Phase 2 (Heightened Alert) period in Singapore. They also invested SGD 45.5m for the 5% stake in ARIF 3.

LREIT also has a healthy balance sheet with a net debt/total assets ratio of ~32.61% and net debt/equity at ~50.18%. In total, they have about SGD 147.3m of undrawn debt facilities and all their properties are unencumbered. They also established an SGD 1b multicurrency debt issuance programme on 8 Jan 2021 which the perpetual bond will be issued under. The LREIT group thus seems to have financing under control. Their interest coverage ratio is also strong with adjusted EBIT/interest expense at ~4.70x in 1HFY21.

Sponsor’s financial performance

In 1HFY21, Lendlease Corporation Limited reported a 25.3% YoY drop in revenue from contracts with customers to AUD 4,868m. The group made a profit after tax of AUD 196m and that is down 37.3% from AUD 313m in 1HFY20. Core Segment EBITDA fell to AUD 469m during the 1HFY21 on the back of challenging operating conditions. The development pipeline conversions were limited, while construction revenue, investment income and asset management fees were suppressed. Development activities contributed the most to operating results as the group was on track to deliver the first residential tower at Barangaroo.

Covid-19 has resulted in delays in the group’s urbanisation pipeline with weak tenant demand seen in its office sector. However, government stimulus measures such as first home buyer schemes have lifted apartment launches and sales enquiries. Within the construction segment, projects were delayed because of the pandemic and this has dampened on-site productivity. In Investments, the group provided rental relief to retail tenants whilst recording lower investment income due to the weak retail mall traffic.

Nevertheless, the aggregate cash position of AUD 899m as at 31 Dec 2020 was able to cover its AUD 535m of short-term borrowings. There were AUD 1,917m of outstanding commercial notes but the group may use its AUD 3,813m of undrawn facilities to repay the notes.

According to their presentation, the ratio of borrowings to total equity increased from 25.7% in FY2020 to 28.0% in 1HFY21. Net debt to total tangible assets climbed from 5.7% to 12.9% in the same period. Meanwhile, interest cover soared from 2.8x in FY2020 to 6.7x in 1HFY21, but that was due to the exclusion of AUD 525m of engineering restructuring provisions in FY2020. The average cost of their debt fell from 3.4% in FY2020 to 3.3% in 1HFY21. As such, the sponsor should not affect LREIT adversely due to its healthy credit ratios.

Relative valuation

We first look at the yield-to-calls (“YTC”) of perpetual notes issued by some REITs, mostly office/commercial REITs.

Figure 1: Perpetual bonds of SGD REIT issuers

Based on yields and referring to Figure 1 alone, the ARASP 5.600% Perpetual Corp (SGD) issued by ARA Asset Management Ltd. (“ARA”) looks the most attractive. However, for its credit ratios, the new LREIT NC5 perp is not looking too bad either at an initial price guidance (“IPG”) of 4.35%. Its small portfolio size of two properties could be a reason why the IPG is higher than the YTCs of other office/commercial REITs.

Table 1: Credit ratios of selected comparable REITs

As at 31 Dec 2020Net debt/
total assets
Net debt/
equity
TTM adjusted EBIT/
interest expense (x)
LREIT32.61%50.18%4.70
Starhill Global REIT33.12%51.95%6.91
Suntec REIT51.33%75.23%1.84

Source: Company financial statements, Bloomberg Finance L.P., iFAST estimates

Comparing across most SGD perps, we think that the OLAMSP 5.375% Perpetual Corp (SGD) and the ARASP 5.600% Perpetual Corp (SGD) are equally as attractive. For investors looking at investing in perpetual bonds issued by REITs, the LREIT perps still provide a reasonable yield and would be a decent investment with a potential 4% yield.

Figure 2: SGD perpetual bonds

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ARASP 5.200% Perpetual Corp (SGD) and OLAMSP 5.375% Perpetual Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities. 


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