Improving outlook
? 1HFY6/22 DPU of 2.40 Scts (+2.6% yoy) was in line with our expectations.
? Rental reversion continues to be encouraging at a high positive single digit.
? Improving Covid-19 situation bodes well for 313’s performance. Maintain Add.
Stronger DPU boosted by income contributions from Jem
LREIT’s 1HFY6/22 DPU of 2.40 Scts (+2.6% yoy) was in-line, at 50.6% of our full-year forecast. While 1HFY22 revenue and NPI fell 5.8% and 2.5% yoy respectively to S$39.2m and S$29.6m, distributable income rose 3.8% yoy to S$28.6m due to associate profit contributions of S$7.4m, generated from its 31.8% stake in Jem. 1HFY22 revenue and NPI of 313 and Sky Complex declined on a yoy basis. 313’s 1HFY22 revenue dropped 7.8% yoy due to lower rental reversion from the leases renewed at 313 previously, while the weaker revenue from Sky Complex (-1.6% yoy) was due to the weaker euro against S$.
313 delivered positive rental reversion and high occupancy
Portfolio achieved a record high occupancy rate of 99.9% in 2QFY22, up from 99.8% in 1QFY22. 313’s occupancy rate improved from 98.9% to 99.7%, while Sky Complex continued to be fully occupied by anchor tenant, Sky Italia. 2021 tenant sales continued to outperform footfall, improving 7.8% yoy and recovered to 80% of pre-Covid 19 levels. Portfolio rental reversion in 1HFY22 achieve an encouraging high positive rental reversion vs. the negative rental reversion recorded in FY21. We understand that the fashion trade category reported weaker rental reversion vs. F&B. LREIT did not offer any rental rebates in 2QFY22. We expect LREIT to deliver positive rental reversion in FY22F as it has a small 7% of leases by gross rental income remaining to be renewed for the rest of FY22F. Should the Covid-19 situation continue to improve, we expect LREIT to deliver an equally favourable rental reversion in FY23F.
More inorganic potential
The Grange Road carpark redevelopment is progressing well and LREIT is finalising the space requirement with its tenant, Live Nation. LREIT will be deploying c.660 sq ft of bonus GFA to prime units at the ground floor of 313 which will help to boost 313’s income. It has a remaining 10,200 sf of untapped GFA which it aims to deploy post Covid-19 to maximise returns. The REIT will be focusing in upping its stake in Jem from the current 31.8% for now, but it also does not rule out an overseas expansion, especially in Milan where it has an asset. It remains confident that it can eventually acquire the remaining stake it does not currently own in Jem. Its healthy gearing of 33.5% will help to support acquisition plans. Interest rate hikes are less of a concern for LREIT as it has hedged >90% of its borrowings.
Reiterate Add with an unchanged DDM-based TP of S$0.956
LREIT’s FY22-23F DPU growth will be underpinned by annual rental escalations in c.60% of the mall’s NLA, the long lease structure of Sky Complex, the redevelopment of Grange Road carpark, and acquisitions of additional stakes in Jem. Re-rating catalysts/downside.