<Alert!> Lendlease Global Commercial REIT – Growing faith in Orchard retail
- LREIT reported full year DPU at 4.85 Scts, ahead of our estimates
- Key positives: (i) 313@Somerset amongst the first to turn a positive reversion along Orchard Road; Tenant sales above pre-pandemic levels for the latest quarter for both JEM and 313@Somerset, (ii) Portfolio valuation stable supported by stronger cash flow performance of Singapore assets and 25 bps compression at Sky Complex
- Datapoints we are watching: (i) Orchard retail momentum to continue into calendar year 2H22, (ii) Replacement of fashion tenant Cotton On to come with potential rental upside
- Maintain BUY with unchanged TP of S$1.05
Full year DPU at 4.85 Scts ahead of full year estimates
- LREIT reported gross revenue of S$62.5m (+69% y-o-y) and NPI of S$45.9m (+73%)
- Distributable income for the half rose 56% y-o-y to S$42.9m bringing full year DI to S$71.5m.
- This is boosted by the incremental contributions from JEM and higher income generated from 313@Somerset.
- Correspondingly DPU full the full year at 4.85 Scts per unit (including advance distribution of 1.1371 Scts in 3QFY22) is marginally ahead of our full year estimates.
313@Somerset growing faith in Orchard retail
- 313@Somerset first to saw positive reversions at 3.6% for the full financial year.
- Portfolio occupancy remains high at 99.8%, including performance from JEM.
- Approximately 80% of leases by NLA are tagged to built-in annual escalations.
- WALE by GRI stood at 5.5 years, anchored by long-standing office leases which contribute c.29% by GRI.
- Tenant sales recovered to above pre-pandemic levels at both JEM and 313@Somerset.
- Occupancy cost at 313@Somerset is currently c.20% lower than pre-covid levels, leaving substantial room for improvements in passing rents at the mall.
- Anchor tenant Cotton is changing store fronts at 313@Somerset. LREIT has secured a tenant to replace Cotton On’s previous space spanning basement one and level one.
- More NLA was unlocked at JEM since LREIT’s acquisitions including an additional two leasable units created in the basement.
Valuation uplift on stronger performance of Singapore properties, cap rate compression at Sky Complex
- On the portfolio valuation front, LREIT’s valuation rose 2.5% y-o-y to S$3.6b supported by stronger underlying performance at JEM which saw a 2.3% uplift in valuation y-o-y.
- Cap rates remains stable and unchanged in Singapore with 313@Somerset at 4.25% cap, and JEM at 4.5% (retail) and 3.5% (office) cap.
- Sky Complex on the other hand saw a 25bps narrowing of cap rate y-o-y to 5.0%, which saw a 18.4% y-o-y uplift in valuations on euro terms.
Higher gearing of 40% with JEM under its belt
- Gearing ratio ended the financial year at 40%, with an average running cost of debt of 1.69%.
- Approximately 59% of borrowings are hedged onto fixed rates and 62% of borrowings on sustainable financing.
- LREIT’s euro denominated loans worth €285 will be up for refinancing in the next financial year.
- With credit profile improving substantially since IPO, LREIT do not expect a substantial increase in interest rate for FY23’s refinancing.
- Every 50bps of increase in interest rate will have a 2.8% sensitivity impact to underlying DPU.