1QFY24 Update – 20% rental reversions unlocked at 313@Somerset
- High retail reversions at 16.3% signed for the quarter, led by 313@Somerset which has unlocked reversions of above 20%
- Portfolio tenant sales continue to track ahead of peers, in the range of 110 to 120% of pre-COVID levels; Tenant sales to see an exponential spike going into festive quarter ending Dec-22 where sales rocketed to c.150% levels in Dec-22
- Interest cost to land closer to 3.5% for full year FY24, with ICR ratio to come closer to 3.3x on our estimates; LREIT reiterates that they will not be considering equity fund raising at this juncture
- Maintain BUY with TP of S$0.90, forward yields of 8.0%
High retail reversions of 16.3% signed for the quarter; 313@Somerset reversions at >20%. LREIT posted strong operational results that are in tandem with optimism that we have been hearing from other retail landlords. Occupancy ended the quarter at 99.9%, while retail reversions were stronger than expected at 16.3%. Reversions signed for the quarter was stronger at 313@Somerset (reversions >20% for the quarter), while JEM mall contributed to a high single digit reversion for the quarter. There remains just c.4% leases by NLA and 8% by gross rental income up for renewal for the remaining year.
Footfall tracks above pre-COVID levels. Portfolio tenant sales trended in the range of 110 to 120% of pre-COVID levels, lending support from stable footfall at JEM mall and recovering footfall at 313@Somerset, potentially from a return of tourist footfall within the Orchard precinct. Operational performance continues to track ahead of Orchard peers which are trending in the range of 90-100% of pre-COVID levels. We foresee continued tenant sales traction going into calendar quarter 4Q22 which is a seasonally high quarter for LREIT, where sales saw a spike to 150% of pre-COVID levels for the month of Dec-22.
Interest rates expected to land at 3.25 – 3.5% for full year FY24 in line with our estimates. Interest cost for the quarter rose 25 bps q-o-q to 2.94% primarily from floating rates, while ICR ratio declined to 3.9x in tandem with higher rates (4Q23: 4.2x). This remains well above bank covenant ratios of 2.0x. We recap that there will be no renewals due in this financial year which will help support ICR ratio, alongside a 61% fixed hedge ratio. Some form of interest cost savings is expected to materialise from sustainability-linked loans (89% of total committed facilities) for the rest of the years upon achieving sustainable-linked targets. We have priced in sufficient interest cost buffers for LREIT for FY24F, and expect ICR ratio to stabilise closer to 3.5x on a 3.25% interest cost to c.3.3x one a 3.50% interest cost for full year FY24. LREIT has reiterated that they will not be considering equity fund raising at this juncture, and instead, ride out the high interest rate environment before considering further portfolio rejuvenation initiatives.