Advertisements

1QFY22 Business Update: Unique Positioning Along Orchard Road Drives Positive Reversion

313@Somerset achieved high single-digit positive rental reversion driven by new and renewed leases for F&B outlets. Retailers are attracted to 313@Somerset due to the potential of a multifunctional event space at Grange Road car park, attracting more
shopper traffic. LREIT provides attractive distribution yield of 5.3% for FY22 and 6.0% for FY23. Inclusion in the FTSE EPRA Nareit Developed Asia Index will put LREIT on the radar of many institutional funds. Maintain BUY. Target Price: S$1.03.

Advertisements

WHAT’S NEW

• Lendlease Global Commercial REIT (LREIT) provided business updates for 1QFY22:

• 313@Somerset: Positive surprise from positive rental reversion. LREIT has substantially de-risked by renewing many leases at 313@Somerset. It achieved high single digit positive rental reversion driven by new and renewed leases for F&B outlets in 1QFY22. Leases expiring in FY22 were reduced to 4% of NLA (previous: 9%) and 11% of gross rental income (previous: 24%). Tenant retention ratio improved to 90%, compared with 61.5% as of Jun 21. Occupancy for 313@Somerset remains high at 98.9%.

• Shopper traffic and tenant sales have improved by 10.4% qoq and 3.1% qoq respectively in 1QFY22 despite the cessation of dining in at F&B outlets under Phase 2 (Heightened Alert) from 22 July to 9 Aug 21. New tenants at 313@Somerset include Marks & Spencer (British retailer specialising in clothing, home products and food products), Super Coconut (coconut drink kiosk), Miniso (Japanese-style variety store) and Playmade (Taiwanese bubble tea). LREIT conducted promotional campaigns to support tenants by driving shopper traffic and tenant sales.

• Sky Complex: Providing income stability. Occupancy at Sky Complex was maintained at 100%. Sky Italia has made timely rental payments and there are no rental arrears to date. Enquiries on application for season parking have increased, which indicate that more employees plan to return to their offices. Sky Complex provides income stability due to long weighted average lease expiry (WALE) of 10.6 years.

• Healthy balance sheet. Aggregate leverage is healthy at 34.3% and interest coverage is high at 8.8x. Two-thirds of borrowings are denominated in the Euro, which provides a natural hedge and keeps cost of debt low at 0.90%. LREIT has no refinancing till FY23.

Advertisements

STOCK IMPACT

• Redevelopment of car park draws more youths to 313@Somerset. Construction for the redevelopment of Grange Road Car Park into a multi-functional event space is scheduled to commence by end-21. The project is 100% pre-committed and is anchored by Live Nation, a leading live entertainment company listed on NYSE (ticker: LYV US). Other tenants are F&B outlets, a museum and a cinema. The redevelopment provides double-digit ROI with average rent for NLA of 42,000sf at high single digits. Live Nation will organise 4-5 events per day with an audience of 2,500-3,500 persons per event, drawing more youth to 313@Somerset.
The event space is expected to be operational by early-23.

• Expansion to suburban retail mall through Jem. Jem is an integrated development with total NLA of 892,000sf (retail: 65%, office: 35%) at Jurong Gateway, touted as Singapore’s second CBD. It is located next to Jurong East MRT interchange station, which is served by four MRT lines (existing East-West and North-South Lines and upcoming Jurong Region Line and Cross Island Line), and Ng Teng Fong General Hospital. Anchor tenants for the six levels of retail space include IKEA, FairPrice Xtra, Cathay Cineplex, Don Don Donki, H&M, Koufu, Uniqlo and Courts. The 12 levels of office space are fully leased to the Ministry of
National Development with a long WALE of 24 years.

• LREIT completed the acquisition of a 31.8% indirect interest in Jem on 21 Sep 21. The acquisition increases AUM by 18% to S$1.8b. Jem will account for 20.9% of LREIT’s AUM. Reliance on 313@Somerset will be reduced from 67.6% to 55.1% of AUM. Suburban retail will account for 16.2% of AUM, which provides resiliency and stable income. The acquisition is accretive to pro forma FY20 DPU by 3.6%. Management will study the feasibility of creating more leasable space at B1 to unlock value through asset enhancement initiatives.

• Sewing up the remaining 68.2% stake in Jem. The two funds Lendlease Jem Partners Fund (LLJP) and Asia Retail Investment Fund 3 (ARIF3) have reached their liquidity window this year whereby all investors have to decide whether to hold or divest Jem. Being the largest investor in LLJP and ARIF3, LREIT has significant influence over the decision. LREIT plans to sew up the acquisition of the remaining 68.2% stake in Jem worth S$1.2-1.4b within the next 12 months.

• Well-deserved recognition with inclusion in key real estate index. LREIT was included in the FTSE EPRA Nareit Developed Asia Index with effect from 20 Sep 21. Trading liquidity has improved. Average daily turnover increased by about 20% to US$2.4m since the inclusion in the index.

Advertisements

EARNINGS REVISION/RISK

• We raised our DPU forecast for FY22 by 2.2% and FY23 by 2.7% due to v-shaped recovery to positive rental reversions at 313@Somerset.

VALUATION/RECOMMENDATION

• Maintain BUY. Our target price of S$1.03 is based on DDM (cost of equity: 6.0%, terminal growth: 1.0%). LREIT provides attractive distribution yield of 5.3% for FY22 and 6.0% for FY23.

Advertisements

SHARE PRICE CATALYST

• Household members would be allowed to dine in at F&B outlets in groups of up to five starting 10 Nov 21, which would usher shoppers back to 313@Somerset.

• Employees who are fully vaccinated or have recovered from COVID-19 returning to work at their offices starting 1 Jan 22, which increase shopper traffic and tenant sales at downtown malls, such as 313@Somerset.

• Gradual reopening of Singapore’s international border to tourists with more vaccinated travel lanes (VTL) and increase of VTL quota in 2022 and 2023.