Ingesting The Acquisition Of Jem In 3QFY22
313@Somerset maintained positive rent reversion at mid single-digit and high
occupancy of 99.4% in 3QFY22. Sky Complex will enjoy rental escalation of 4.68%
starting May 22 based on the 6.24% increase in ISTAT CPI in Apr 22. LREIT benefits
from full contribution and tax transparency from Jem in FY23 as the acquisition of the
remaining 68.2% stake was completed in Apr 22. LREIT provides an attractive FY23
distribution yield of 7%. Maintain BUY. Target price: S$1.05.
RESULTS
• Lendlease Global Commercial REIT (LREIT) provided a business update for 3QFY22.
• 313@Somerset maintained positive reversion. Portfolio occupancy was stable at 99.9%
in 3QFY22. Occupancy at 313@Somerset eased slightly by 0.3ppt qoq to 99.4%. The
downtown mall maintained positive rent reversion at mid single-digit.
• Strengthened tenant mix with refreshed offerings. New tenants at 313@Somerset
include kskin (express beauty care from South Korea), Chinese Tofu Magician (chewy mochi
drink from Hunan, China), Sukiya (authentic beef bowl from Japan) and Fjallraven (outdoor
apparel from Sweden). 313@Somerset has a healthy tenant retention rate of 71.1%. Only
1% of the portfolio’s total NLA is due for renewal for 4QFY22.
• 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: Benefitting from higher inflation. 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 (CPI). ISTAT CPI increased 6.24% in Apr 22. Thus, Sky Complex will
enjoy rental escalation of 4.68% starting May 22. Sky Complex maintained full occupancy of
100%. It has long weighted average lease expiry (WALE) of 10.1 years
• Healthy balance sheet. LREIT has low aggregate leverage of 27.7% as of Mar 22.
Aggregate leverage would increase to 40.7% after completing the acquisition of 68.2% stake
in Jem in Apr 22. Management estimates that weighted cost of debt will increase from
current 0.98% to 1.2% after the issuance of sustainability-linked loan of S$860m to finance
the acquisition. LREIT has sufficient bank facilities to refinance debt due in FY23. 90% of the
borrowings are hedged to fixed rates.
STOCK IMPACT
• Jem: Enhancing scale in home base Singapore. LREIT has completed the acquisition of
the remaining 68.2% stake in Jem on 22 Apr 22. Jem achieved positive rent reversion in
3QFY22. With ownership of Jem at 100%, LREIT is able to generate recurrent savings of
S$5.6m per year from tax transparency.
• Becoming more diversified and resilient. The acquisition expanded LREIT’s AUM by 2.1x
to S$3.6b. The resilient and defensive suburban retail will account for 46.8% of the enlarged
portfolio compared to 16.3% previously, based on its previous 31.8% effective stake. In
terms of trade sector mix, the acquisition increases the exposure to essential services and
non-discretionary trade from 52% to 59% of gross rental income. Jem has a quality base of
tenants, such as IKEA, FairPrice Xtra, Cathay Cineplexes, Don Don Donki, Uniqlo and
Koufu. The government through the Ministry of National Development accounted for 12% of
gross rental income. Portfolio WALE will also improve from 8.4 to 8.9 years.
• Focusing on expansion in Singapore. LREIT plans to grow through acquisitions by
tapping on the rights of first refusal (ROFR) provided by its sponsor. Lendlease Group has a
strong presence in Singapore through Paya Lebar Quarter (30% stake) and Parkway Parade
(10.2% stake).
• Shielded from higher cost of electricity in FY23. Management has locked in cost of
electricity for 313@Somerset and Jem at fixed rates in FY23. Utilities account for 6-8% of
operating expenses, lower than comparable retail malls, due to energy saving features,
including atrium daylighting to maximise the use of natural sunlight, usage of low-E double
glazed glass for the facades, and installation of solar panels.
EARNINGS REVISION/RISK
• The acquisition of the 68.2% stake in Jem was funded by private placement (S$400m),
preferential offering (S$249m), perpetual securities (S$200m) and sustainability link loan
(S$860m). We have raised our existing FY23 DPU forecast by 3% as equity fund raising was
downsized by 23%.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.05 is based on DDM (cost of equity: 6.25% (previous:
6.0%), terminal growth: 1.2%).
SHARE PRICE CATALYST
• All employees have been allowed to work from their offices since 1 Apr 22, which will
increase shopper traffic and tenant sales at downtown malls, such as 313@Somerset.
• Reopening of Singapore’s international borders through the vaccinated travel scheme, which
commenced in Apr 22, bringing tourists back to shop at Orchard Road.