Rental uplift of +15% at Sky Complex post lease restructuring
- 1H24 revenue of S$119.9m includes supplementary rents from Sky Italia termination; core revenue rose 5.1% y-o-y; DPU of 2.10Scts behind estimates on interest cost
- Portfolio occupancy declines to 88% as Sky Complex lease restructuring starts
- Retail reversions robust at +15.7%, tenant sales maintained across peak travel quarter in 4Q24
- Maintain BUY with unchanged TP of S$0.90, revised FY24F yield of 6.8%
1HFY24 results
- Gross revenue rose 17.9% y-o-y to S$119.9m (+5.1% y-o-y after exclusion of supplementary rent from Sky Italia lease restructuring)
- NPI rose 22.2% y-o-y to S$93.4m
- Distributable income declined 12% y-o-y to S$49.3m, while 1H DPU of 2.10Scts makes up 47% our full-year estimate of 4.48Scts
- Retail reversions came in at a strong 15.7%
- Portfolio occupancy declined to 87.9% and was within expectations (SG assets maintained at c.100% occupancy), primarily due to a c.20% decline in Sky Complex’s occupancy, where master lease tenant Sky Italia returned one out of three towers at the property
- Tenant sales rose 0.6% y-o-y, to be maintained within the range of c.110%-120% of pre-COVID levels in CY 2H24 with a similar boost in sales across December festivities with a spike to c.150% of pre-COVID levels
- Footfall trends better than expected, at c.100%-110% of pre-COVID levels for the period
- Supplementary rent received during this period from the Sky Italia lease restructuring was worth two years of rent from Block 3
- Gearing reached 40.5% as at 31 December 2023, with an average cost of debt of 3.38% (+43bps q-o-q), higher than expectations
- Interest coverage ratio was 3.8x, with 61% of debt coming under fixed borrowing cost
Well-positioned assets to capture domestic footfall. LREIT continues to show resilient retail operations, maintaining both traffic footfall and tenant sales across 4Q23, even as industry retail data shows a downward tick in spending as Singaporeans travel abroad. Reversions come in stronger than expected, at +15.7%. Meanwhile, more of the rental uplift, we understand, would only reflect as GRI in FY2H24.
Supplementary rent to buffer against rental gap at Sky Complex from FY2H24. Total one-off supplementary rents, which we estimate to be c.S$13m, has been accounted for in the books in 1H24 and should go towards income distribution to buffer against the temporary income gap in Milan, as announced by LREIT. Management has shared that the supplementary rents received from Sky Italia will be staggered across the two years, to match the ‘loss’ of master lease income during the period. In time to come, the ramp up of occupancy at Block 3 through a multi-tenant lease structure should start making contributions.
Shifting estimates to reflect lease restructuring at Sky Complex. The capex commitment to Sky Italia and for fitout works pertaining to Block 3 has not been shared, and we have considered a capex drawdown of c.S$5m this year to fulfil the capex requirements of both parties, funded fully via debt. Moreover, we estimate that LREIT will be able to reach 50%/75% occupancy for the multi-tenanted Block 3 in FY25/FY26, at a rental rate of €280psm p.a., below submarket passing. Upon stabilisation and excluding supplementary rents, we expect the NPI contribution from the multi-tenanted segment to stabilise at c.33% (NLA exposure of c.27%), and for overall rental income from Sky Complex to stabilise at 15% higher in FY27, when supplymentary rents fully taper off, than previous rates (FY23).
Valuation upside from Sky Complex a medium-term driver to NAV? We see Sky Complex’s lease restructuring to be a medium-term driver to NAV, which would uplift valuations at the property, albeit with more stress on the Lendlease Group’s leasing team in the short term. The overall increase in passing rents for the asset will move in tandem with the backfilling of Building 3, which is newly released by master lease tenant Sky Italia and repositioned as a multi-tenant building. Leasing works should start by early CY2Q24 as LREIT repossess Building 3 this quarter, CY1Q24. There is potential for LREIT to bring up the rents for Block 3 closer to submarket rents, which are c.50% higher, at €320psm p.a., and effectively increase the asset valuation of Sky Complex, which is derived on a discounted cash flow basis. While a medium-term catalyst, we see this as a catalyst that could, over time, bring down LREIT’s gearing of 40.5%, which is higher than the average of the overall retail sector
Maintain BUY with TP of S$0.90. We maintain our BUY call for LREIT with a revised DPU estimate for FY24F/FY25F of 4.2Scts/4.5Scts. We have shifted upwards our interest cost assumption by another 40bps this year to an average cost of 3.9% for the full year of FY24, while pushing back the income contribution from the Grange Carpark by another year. Our revised estimates translate to a 6.7%/7.1% forward yield.
