First step towards restoring inorganic growth
- Restructuring of Sky Complex lease is the first step in the divestment plan for Building 3, which will improve gearing and restore inorganic growth ability.
- Favourable restructuring outcome – long lease with pre-termination fee.
- Reiterate Add. Potential DPU upside on faster lease-up of Building 3.
Buildings 1 & 2 leases re-leased on similar terms; till Jan 2033
LREIT announced that it has restructured the lease for Sky Complex, which comprises Buildings 1, 2 and 3 and originally ran until May 2032 with an option to pre-terminate the lease in 2026. LREIT signed a new lease for buildings 1 and 2 with the current tenant for an initial term of 9 years and 1 month, running from 15 Dec 23 till 15 Jan 2033. The tenant has the option to renew the lease for an additional 6 years. The new lease is also subject to annual indexation based on the increase in the ISTAT CPI. There is no pre-termination clause in the new lease. The starting annual rent for Buildings 1 and 2 will be approximately 1.5% higher than the existing in-place rent based on the original lease. This increase is in
addition to the recent positive 5.9% rental increase in May 2023. The new lease includes a tenant incentive in line with market standards.
Two years “pre-termination fee” for return of Building 3 in 1QCY24
Tenant Sky Italia will return Building 3 to LREIT in 1QCY24, upon the completion of reinstatement works, and will pay LREIT a “pre-termination” consideration equivalent to 2 years of existing annual rent of Building 3, which will help to mitigate vacancy risk as LREIT attempts to lease up the building as a multi-tenanted building. Market rents are €300-350 per sq m p.a., c.60-86% above the previous rent paid by Sky Italia, providing rental upside for LREIT, in our view.
First step towards deleveraging & restoring inorganic growth story
Restructuring of the Sky Complex lease is positive for LREIT and is the first step towards LREIT’s divestment strategy for Sky Complex. LREIT expects valuation uplift for Building 3 post-conversion to multi-tenancy, after which it plans to divest the building, crystalise divestment gain and improve its gearing ratio. Management estimates that tenant concentration risk will fall from 13.6% of 1QFY6/24 gross rental income to c.10.2% of pro forma 1QFY6/24 gross rental income (assuming Building 3 was returned during the period).
Reiterate Add, DPU upside if LREIT can lease Building 3 up faster
We tweak our FY24F-26F DPU forecasts by -0.7%-+1.4% to factor in the restructured lease at Sky Complex. FY24F DPU slips 0.7% as we pencil the 1.5% rent increase for 5.5 months in FY24F, which is lower than our previously forecast annual indexation, while FY25F-26F DPU increases by 1.1-1.4% as we impute the two year “pre-termination” consideration for Building 3, while assuming that LREIT will be able to secure some tenancies from FY25F onwards. Our DDM-based TP rises from S$0.82 to S$0.83. Potential re-rating catalysts: stronger rental reversions and improvements in financial metrics which
would restore its ability to grow inorganically
