Addressing Risk Of Pre-termination By Sky Italia
The restructuring of leases with Sky Italia has a neutral impact on LREIT. The lease expiry for Building 1 and 2 remains unchanged in 2032, although Sky Italia has an option to renew for another six years. LREIT is compensated S$6m for the early termination of Building 3. Prospective new tenants for Building 3 include companies in the technology, real estate and energy industries. LREIT provides an attractive FY24 distribution yield of 8.0%. Maintain BUY. Target price: S$0.87.
WHAT’S NEW
• Restructured lease with tenant Sky Italia. Lendlease Global Commercial REIT (LREIT) has entered into a new lease agreement with Sky Italia in respect of Sky Complex located in Milan, Italy. The tenant will lease Buildings 1 and 2 for an initial term of nine years and one month commencing on 15 Dec 23 (tenant has no right to pre-terminate) with an option to renew for an additional six years at market rents. The starting annual rent for Buildings 1 and 2 is 1.5% higher than the existing in-place rent. The tenant will return Building 3 to LREIT in 1Q24 upon the completion of reinstatement works. It will compensate LREIT two years of existing annual rent, which we estimate at €4m (S$6m).
• Addressing risk of pre-termination or downsizing by Sky Italia. The new lease agreement allays investors’ concern over the risk of Sky Italia exercising its option to pre-terminate in 2026. The original lease expires in May 2032 but Sky Italia has the option to terminate its lease in 2026. LREIT intends to utilise Building 3 for multi-tenancy purpose, which reduces tenant concentration risk. LREIT’s reliance on largest tenant Sky Italia would be reduced from 13.6% to 10.2% of pro forma 1QFY24 gross rental income. Building 3 accounts for only 3.9% of LREIT’s monthly gross rental income. LREIT has the potential to secure new tenants at higher prevailing market rates.
STOCK IMPACT
• MSG evolving into major decentralised office district. The Milano Santa Giulia (MSG) has transformed into Milan’s key decentralised office district. The southern zone, where Sky Complex is located, has been designated as the new business district in Milan. Italy’s largest music academy, Giuseppe Verdi Conservatory, will set up a new campus in the south zone of MSG, adjacent to Sky Complex, by end-25.
• Winter Olympics brings prominence. The northern zone is being redeveloped into a large urban park that integrates smart technology and sustainability initiatives. The new Metro Line 4 connecting Rogoredo station to Linate Airport was completed in 2023. The Winter Olympics will be held in the northern zone in 2026.
