2HFY22: Benefitting From Recovery In Retail Sales
LREIT delivered good results with 2HFY22 DPU increasing 4.9% yoy to 2.45 S cents. 313@Somerset achieved positive rental reversion of 3.6% in FY22 and tenant sales exceeded pre-pandemic levels in 4QFY22. Jem contributed as a subsidiary for two months in May and June. Being a pure play on Singapore, LREIT benefits from the reopening of the economy and return of tourists to Orchard Road. LREIT provides an attractive FY23 distribution yield of 6.1%. Maintain BUY. Target Price: S$0.96.
RESULTS
• Lendlease Global Commercial REIT (LREIT) reported good results with 2HFY22 DPU increasing 4.9% yoy to 2.45 S cents, which is in line with our expectations.
• 313@Somerset maintained positive rental reversion. NPI grew 72.9% yoy in 2HFY22 due to accretive acquisition of Jem (acquisition of 68.2% stake completed on 22 Apr 22) and better operating performance from 313@Somerset. 313@Somerset achieved positive rental reversion of 3.6% in FY22 and tenant sales have exceeded pre-pandemic levels in 4QFY22. Occupancy at 313@Somerset improved 0.5ppt qoq to 99.9% in 4QFY22. Jem contributed as a subsidiary in May and June. LREIT’s office portfolio, comprising Sky Complex and the office component of Jem, is fully occupied.
• 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 leased to Puma (sportswear) and Ohayo Mama San (concept cafe). Puma has opened its 7,100sf flagship store, its first in Southeast Asia, at 313@Somerset. 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.
• Strengthened tenant mix and brand engagement at Jem. Kopitiam Food Hall is currently undergoing fitting out and will open at Jem soon. The food court will introduce a new concept of serving all cuisines around Asia in a cosy nature setting. LREIT has converted the seating area at basement 1 into two leasable units. Jem has started to lease its atrium space to increase tenants’ brand engagement with shoppers.
• Sky Complex benefitting from higher inflation. Sky Complex maintained full occupancy of 100%. It is on a long-term lease 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, which translated to rental escalation of 4.68% in May 22. It has long weighted average lease expiry (WALE) of 9.9 years.
• Gains in valuations. Valuation for Jem has increased 2.3% to S$2,134m due to recovery in shopper traffic and tenant sales. Valuation for Sky Complex has increased 18.4% to €3234.5m due to higher market rents. LREIT recognised gains in fair value of investment properties of S$49.1m in 2HFY22.
• Healthy balance sheet. Post-acquisition of Jem, aggregate leverage is 40.0% as of Jun 22 (Mar 22: 27.7%). Cost of debt has increased to 1.69% as of Jun 22 (Mar 22: 0.98%) due to issuance of sustainability-linked loans of S$860m to finance the acquisition of Jem and higher interest rates. LREIT has undrawn bank facilities of S$257.7m to refinance borrowings of S$99.3m due in FY23. Sustainable financing accounted for 62% of its total borrowings.
• Sensitivity to higher interest rates. 59% of the borrowings are hedged to fixed rates. Management estimated that every increase in the base rate of 50bp reduces DPU by 2.8%. We expect cost of debt to reach 1.90% by end-FY23.
STOCK IMPACT
• Benefitting from reopening in Singapore. Safe distancing between individuals is no longer required, whether indoors or outdoors since 26 Apr 22. The cap on group size of 10 persons for dining in at F&B establishments was lifted. All employees are allowed back to their workplaces. The substantial easing will improve shopper traffic and tenant sales at 313@Somerset and Jem.
• 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 abolished on 26 Apr 22. Visitor arrivals to Singapore have surged 30% mom to 543,732 or 35% of pre-pandemic levels in Jun 22. 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.
• Maximising returns from Jem. Jem has become LREIT’s 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 FY22 and provides 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-to-market 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.
• Focus on expansion in Singapore. LREIT plans to grow through acquisitions by tapping on right of first refusal (ROFR) provided by its sponsor. Lendlease Group has a strong presence in Singapore through Paya Lebar Quarter (30% stake) and redevelopment of Comcentre (49% stake). Singtel and Lendlease have entered into a 51:49 JV to redevelop Comcentre at 31 Exeter Road. The new Comcentre comprises two 20-storey buildings with 1,184,000sf of premium grade/Grade A office space and 32,300sf of retail space, including Singtel’s new flagship store.
EARNINGS REVISION/RISK
• We trimmed our existing FY23 and FY24 DPU by 3.1% and 1.3% respectively due to higher interest rates.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$0.96 is based on DDM (cost of equity: 7.25%, terminal growth: 2.0%).
SHARE PRICE CATALYST
• All employees are allowed to work from their offices since 1 Apr 22, increasing shopper traffic and tenant sales at 313@Somerset and Jem.
• Reopening of Singapore’s international borders through the vaccinated travel scheme, which commenced in Apr 22, bringing tourists back to 313@Somerset.