313@Somerset tenant sales bloom to c.125% of normalised levels
1QFY23 Operational Update
Tenant sales at 313@Somerset surge to c.125% of normalised levels in the quarter.
- Portfolio occupancy remained stable at 99.7%, against 99.8% as at end-FY22.
- Retail reversions were at a positive c.1%, while office reversions were stronger, at c.4% on annual escalations.
- Wale stood at 5.5 years by GRI, with 14.5% of leases by GRI expiring for the rest of the financial year.
- On a portfolio basis, tenant sales continued to surpass pre-COVID levels in 1QFY23, with sales at 313@Somerset surging to c.125% of pre-COVID levels in the quarter, far outpacing our expectations.
- Footfall gap against pre-COVID levels has also moderated at c.90% of pre-COVID levels.
- New portfolio tenants include Japanese fashion brand A Bathing Ape and Ramen chain Kanada-Ya.
Margin compression unlocked with sustainability-linked loans.
- Gearing ratio stood at 39.4% with average cost of debt of 2.24%.
- Approximately 61% of borrowings are hedged on fixed rates, with a weighted average debt maturity of 2.8 years.
- Sustainable financing accounts for c.63% of total borrowings, which saw some margin compression during the period from LREIT’s sustainability-linked loans.
- LREIT attained net-zero carbon this year, ahead of their original target of 2025.
- ICR ratio stood at 6.9x.
- Loans due in FY23 have been refinanced to FY28, with c.28% of loans denominated in Euro dollars are up for renewal in FY24.
Grange carpark to see potential delays against our forecast; expect higher reversions moving forward.
- We observe that Grange carpark is still within the early stages of construction but we see potential delays against our initial forecast (completion in mid-23, calendar year).
- Given 1-1.5 years of construction, completion might be pushed back one year against our forecast, to be completed in CY 1H24.
- Asset enhancements continue to be explored by LREIT to further unlock the plot ratio within the retail segment of the portfolio.
- Given the robust tenant sales performance at 313@Somerset, occupancy cost has further reduced by 10%.
- We foresee stronger reversions going forward in the range of a mid-single digit to drive reversionary rents for the retail portfolio.
Maintain BUY with lower TP of S$1.00. We priced in higher interest rate expenses within our assumptions at +60bps/+80bps in FY23/FY24. Risk-free rate re-adjusted to 3.5% to reflect the current investment climate. The completion of the Grange carpark has been postponed from FY24 (Jun 23) to mid-FY24 (Dec 23), within our estimates. Revised DPU at 4.60 Scts/4.61 Scts, implying a forward yield of 6.6%/6.6% at the last trading price (S$0.70).
