Good leasing traction to kick start the year
- 1QFY6/23 retail reversions positive at c.1%, tenant sales at 113% of pre-Covid levels (vs. market’s 109%). Portfolio occupancy remains high at 99.3%.
- Adjusted interest coverage ratio of 2.3x caps regulatory gearing at 45%; further deterioration mitigated by rental growth/deployment of unutilised GFA.
- Portfolio fundamentals still intact. Keep Add with lower DDM TP of S$0.88.
Delivering steady performance
No financials in this operational update. LREIT signed 9.4% GRI in 1Q, reducing FY6/23 lease expiries from 23.9% to 14.5% of GRI. 1QFY6/23 retail reversions were positive at c.1% (FY22: +3.6%), weighed down by replacement of anchor leases at [email protected] that were expiring at higher rents due to built-in rental escalations. Shopper footfall recovered to c.93% of pre-Covid levels, while tenant sales came in at 113% of pre-Covid levels, above 3QCY22’s retail sales values of 109%. Occupancy cost decreased by 10% and 3-5% yoy at [email protected] and JEM, indicating more room to push rents. Portfolio occupancy slipped 0.3ppts qoq from 99.6% to 99.3% as at 1QFY6/23, due to transitional vacancies at [email protected] which resulted in its occupancy sliding from 99.9% to 98.1%.
Deterioration of credit metrics but mitigating factors in sight
Cost of debt increased qoq from 1.69% to 2.24% due to refinancing and higher base rates on floating loans. As a result, interest coverage ratio declined from 9.2x to 6.9x. Adjusted interest coverage ratio, which factors in coupon obligation to perpetual security holders, stands at 2.3x as at 1QFY6/23, capping LREIT’s regulatory gearing at 45%, still a comfortable c.5ppts away from current gearing of 39.4%. 61% of LREIT’s borrowings on fixed rates. Management is of the view that interest rates will peak in the next 1-2 quarters, and as such, it will refrain from hedging more loans at these temporary elevated rates. No more refinancing required for FY23. 63% of borrowings are from sustainability-linked loans with interest rate step-down features upon attainment of ESG targets. We understand from management that LREIT has already met the step-down criterion, however, step-downs will only be effected after the ESG targets have been validated by lenders. LREIT has c.10k sqft of unutilised GFA at [email protected] to be deployed. Management intends to accelerate the deployment of the unutilised GFA by end-FY23, which in addition to built-in rental escalations and positive reversions, should provide rental and valuation uplift, mitigating deterioration of interest coverage and gearing.
Reiterate Add with a lower DDM-based TP of S$0.88
We keep our FY23-25F DPU estimates unchanged. DDM-based TP falls from S$1.02 to S$0.88 as we impute higher risk-free rate, raising our COE from 7.2% to 8.0%. Demand for space at LREIT’s retail assets remains intact, while long leases at Sky Complex and JEM’s office space provide income visibility. Potential re-rating catalysts include stronger-than-forecast reversions, accelerated deployment of unutilised GFA at [email protected] and accretive acquisition. Downside risks include weaker-than-forecast reversion/leasing and slowdown in consumer spending which may result in lower gross turnover rents and weaker tenant sentiment, impeding LREIT’s ability to command positive reversions.