1HFY22: Continual Enhancement Of 313@Somerset
313@Somerset achieved high single-digit positive rental reversion in 1HFY22. The mall downtown has utilised 660sf of untapped GFA to expand leasable space at two prime units at the ground floor leased to Puma (sportswear) and Ohayo Mama San (concept cafe). The redevelopment of Grange Road car park into a multi-functional event space is expected to be operational by early-23. LREIT provides an attractive distribution yield of 6.2% for FY23. Maintain BUY. Target Price: S$1.03.
RESULTS
• Lendlease Global Commercial REIT (LREIT) reported DPU of 2.40 S cents for 1HFY22 (+2.6% yoy), which is in line with our expectations.
• Revenue headwinds from COVID-19 pandemic and weak Euro. Gross revenue and NPI declined 5.8% and 2.5% yoy respectively. Contribution from 313@Somerset was affected by double-digit negative rental reversion incurred in FY21. Contribution from Sky Complex was affected by the sharp 5% yoy depreciation of the Euro against the Singapore dollar. Property operating expenses dropped 14.9% yoy primarily due to an absence of provisions for doubtful debts of S$1.5m incurred in 1HFY21.
• 313@Somerset saw continued recovery in occupancy. LREIT’s portfolio occupancy reached an all-time high at 99.9%. Occupancy at 313@Somerset improved 0.8ppt qoq to 99.7% in 2QFY22. Sky Complex maintained full occupancy of 100%.
• Rental reversion for 313@Somerset turned around to positive territory. LREIT achieved a high single-digit positive rental reversion in 1HFY22. LREIT strengthened the tenancy mix and refreshed new offerings to rejuvenate 313@Somerset. New tenants include Oakley (sports equipment), Pearly Lustre (jewellery), Chimi’s (Mexican food) and Ramburger (western food). 313@Somerset has a high tenant retention rate of 75.8%. Only 2% of the portfolio’s total NLA is due for renewal for 2HFY22.
• Deploying bonus GFA for new tenancies on prime spaces. 313@Somerset has untapped GFA of 10,860sf due to the increase in permissible plot ratio from 4.9 to 5.6. LREIT has utilised 660sf of the untapped GFA to expand leasable space at two prime units at the ground floor leased to Puma (sportswear) and Ohayo Mama San (concept cafe). The remaining untapped GFA of 10,200sf will be deployed during fit-out periods for new tenants to avoid disruption to the operations of other tenants.
• Sky Complex: Providing income stability. Sky Complex is on a long lease term to Sky Italia until 2032 and annual rental escalation is based on 75% of the changes in ISTAT consumer price index. It provides income stability due to long weighted average lease expiry (WALE) of 10.4 years.
• Maiden contribution from Jem. LREIT has a 31.8% interest in Jem. It contributed profits of S$7.4m. Jem added new tenants Fruit Paradise, Home & Giving, Anothersole and Sunday Staples. Jem’s office component is 100% leased to the Ministry of National Development on a 30-year lease.
• Healthy balance sheet. LREIT has a low aggregate leverage of 33.5%. About two-thirds of borrowings is denominated in the Euro, which provides a natural hedge and keeps weighted cost of debt low at 0.92%. LREIT have no refinancing till FY23. More than 90% of the borrowings is hedged to fixed rates.
STOCK IMPACT
• Redevelopment of car park draws shopper traffic to 313@Somerset. Construction for the redevelopment of Grange Road Car Park into a multi-functional event space commenced at end-21. The space is anchored by Live Nation, a leading live entertainment company listed on the NYSE (ticker: LYV US). 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, which will draw more youth to 313@Somerset. The event space is expected to be operational by early-23.
• Acquiring 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 its investors have to decide whether to hold or divest Jem. Being the largest investor in both LLJP and ARIF3, LREIT has significant influence over the decision. LREIT plans to acquire the remaining 68.2% stake in Jem worth S$1.2-1.4b within the next 12 months.
EARNINGS REVISION/RISK
• We maintained our existing DPU forecast.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.03 is based on DDM (cost of equity: 6.0%, terminal growth: 1.0%).
SHARE PRICE CATALYST
• 50% of employees have been allowed to work from their offices since 1 Jan 22, resulting in an increase in shopper traffic and tenant sales at downtown malls, such as 313@Somerset.
• Gradual reopening of Singapore’s international border to tourists with addition of more vaccinated travel lanes (VTL) and increase in VTL quota in 2022 and 2023.