Recovery in tenant sales outstripping market
- 2H/FY22 DPU of 2.45/4.85 Scts were in line at 51%/102% of our FY22F.
- Portfolio occupancy was high at 99.8% with more organic growth expected.
- Reiterate Add with lower DDM-based TP of S$1.02.
FY22 earnings lifted by acquisition of Jem and strong reopening
FY22 revenue/NPI grew by 29.3%/32.7% yoy to S$101.7m/S$75.5m, boosted by the accretive acquisition of Jem and better operating performance at [email protected] Consequently, DI/DPU grew by 29.7%/3.6% yoy. FY22 NPI margins improved yoy from 72.4% to 74.3% and are expected to remain at this normalised level. Tenant sales are c.15-18% above pre-COVID levels vs. market’s 10%. We understand that [email protected] has achieved higher pre-COVID sales level compared to Jem, lifted by returning tourists.
Organic growth on retail recovery and inflation-linked escalation
[email protected] and Jem have maintained high occupancy of 99.9% and 99.5%, respectively. FY22 reversions for [email protected] and Jem have been positive, with the former coming in at 3.6%. Going forward, we expect demand for these two well located, dominant malls to persist, keeping occupancy high. Portfolio valuation gained 2.5% yoy, attributable to uplift in market rents and improved market outlook while cap rates remain stable. Occupancy cost increased by 7-8% on the back of positive reversions, but remain c.10-15% below pre-COVID levels, implying more room for rental growth. Meanwhile, annual escalation for Sky Complex are based on 75% of Italy’s CPI growth, which increased 6.8% yoy in May 22. Impact from rising electricity rates is mitigated by fixed-rate electricity contracts, which will run until end-FY23 (Jun 23) while the master leasee is responsible for Sky Complex’s utility expenses under the triple-net lease structure.
Gearing still comfortable; more interest rate hedging expected
Post-acquisition of JEM, cost of debt jumped qoq from 0.98% to 1.69% while interest rate hedge declined from 90% to 59%. EUR loans account for 28% of total borrowings. 100%/43% of EUR/SGD loans have been hedged. Going forward, management intends to increase interest rate hedge. Gearing remains slightly elevated at 40%, but well within MAS’s 50% gearing limit, mitigated by robust ICR of 9.2x. LREIT employs a 12-month rolling FX hedge and its blended hedge rate on EUR is 1.56 (vs. spot rate of 1.40).
Reiterate Add with a lower DDM-based TP of S$1.02
FY23-24F DPU estimates lowered by 3.9-4.1% as higher revenue assumptions were wiped out by higher borrowing assumptions. Acquisition of Jem has strengthened LREIT’s portfolio, increasing market capitalisation/deposited property by 1.8x/2.1x to S$1.8bn/S$3.7bn, respectively. We expect organic growth on the back of positive reversions as well as the unlocking of c.10k sqft or 3.5% of untapped GFA at [email protected] LREIT’s pipeline assets include Parkway Parade and Paya Lebar Quarter, the latter could be acquired in tranches due to its strata title. Re-rating catalysts/downside risks include accretive acquisitions/weaker rental reversion.