Ingesting The Acquisition Of Jem
Jem attracts shopper traffic of 22m per year due to an attractive mix of anchor tenants,
such as IKEA, FairPrice Xtra, Don Don Donki, H&M, and UNIQLO. It provides organic
growth from positive rent reversion and annual rental escalation of 3.2%. The return of
tourists in 2H22 would restore shopper traffic at 313@Somerset back to pre-pandemic
levels. Unit price has corrected 15% from its recent peak and FY23 distribution yield is
attractive at 6.8%. Maintain BUY. Target price: S$1.01.
WHAT’S NEW
• Maximising returns from Jem. Jem has become Lendlease Global Commercial REIT’s
(LREIT) largest asset, accounting for 46.8% of asset under management (AUM) after it
completed the acquisition of the remaining 68.2% stake on 22 Apr 22. The retail component
(65% of NLA) achieved positive rent reversion in 2QFY22 and 3QFY22. It provides organic
growth with annual rental escalation of 3.2%. The office component (35% of NLA) is fully
leased to the Ministry of National Development (MND) under a 30-year lease with mark-tomarket rent reviews every five years. With ownership of Jem at 100%, LREIT is able to
generate recurrent savings of S$5.6m per year from tax transparency.
• Benefitting from development of Jurong Gateway as the second CBD. Jem is a popular
suburban mall with shopper traffic at 22m per year and occupancy at 100%. Management
plans to unlock additional NLA at level one (4,600sf) and basement one (850sf) to cater for
demand for more retail space. The link bridge connecting Jem to Perennial Business City
with NLA of over 1m sf is already completed. Perennial Business City is expected to
progressively commence operations in 2022, which will increase the flow of office workers
visiting Jem. Over the longer term, connectivity to Jem will improve with the new Jurong
Region MRT Line that will commence operations in stages from 2027 to 2029.
• Welcoming tourists back to 313@Somerset. The Vaccinated Travel Framework has
replaced the Vaccinated Travel Lane scheme since 1 Apr 22 and the requirement for predeparture COVID-19 tests was subsequently abolished on 26 Apr 22. Visitor arrivals to
Singapore have increased 43% mom to 294,304 in Apr 22 (19% of pre-pandemic levels).
Shopper traffic was 5.8m in 3QFY22, representing 67% of pre-pandemic levels. The return of
tourists, which typically accounts for 20-25% of shopper traffic, would restore shopper traffic
at 313@Somerset back to pre-pandemic levels.
• 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.
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 had
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 (18
months to complete).
• 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 has maintained full
occupancy of 100%. It has long weighted average lease expiry (WALE) of 10.1 years as of
Mar 22.
STOCK IMPACT
• Focusing on expansion in Singapore. LREIT plans to grow through acquisitions by
tapping on the rights of first refusal (ROFR) granted 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
• Factoring in weakness of the euro. The euro has depreciated by 5.6% against the
Singapore dollar on an ytd basis, which will reduce the contributions from Sky Complex (12%
of AUM). Thus, we have trimmed our FY23 DPU forecast by 4%.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price for LREIT of S$1.01 is based on DDM (cost of equity:
6.25%, terminal growth: 1.2%).
SHARE PRICE CATALYST
• The cap on group size of 10 persons for dining in at F&B establishments was lifted and all
employees have been allowed back to their offices since 26 Apr 22. These would increase
shopper traffic and tenant sales at 313@Somerset and Jem.
• Reopening of Singapore’s international borders with the vaccinated travel framework (VTF)
would bring tourists back to 313@Somerset.