Introduction

Lendlease Global Commercial REIT (LREIT) continues to show resiliency and strategic growth in the commercial real estate sector. This in-depth analysis covers their recent performance, key developments, and future outlook, making it a valuable read for investors and stakeholders in the real estate market.

Company Overview

LREIT invests in stabilized income-producing properties globally, focusing on retail and office purposes. Its portfolio includes two retail malls 313@Somerset at Orchard Road and Jem at Jurong East in Singapore, as well as the Sky Complex with three grade A office buildings in Milan, Italy.

1QFY25 Performance Highlights

The first quarter of FY25 demonstrated LREIT’s resilience, particularly in Singapore. Key highlights include:

• Stable high single-digit rental reversion for Jem.
• Slight easing to high teens rental reversion for 313@Somerset.
• Secured new electricity tariff contracts for both malls, reducing utilities expenses by 30% or S\$4m-5m per year.
• Occupancy at Building 3 of Sky Complex expected to rise above 30%, pending successful lease conclusions.

Detailed Financial Analysis

LREIT provided robust financial updates for 1QFY25, reflecting its strategic management and operational efficiency.

Resiliency Growth

Rental reversion maintained a positive double-digit average of 11.4% in 1QFY25. Jem remained fully occupied, while 313@Somerset achieved a near full occupancy at 99.6%.

Tenant Sales Performance

Despite a 5.7% year-on-year drop in tenant sales, figures remained 11% above pre-pandemic levels. Temporary disruptions at Jurong East MRT affected Jem, and renovations at Food Republic at 313@Somerset impacted shopper traffic.

Cost of Debt

Aggregate leverage remained stable at 40.7%, with 70% of borrowings at fixed interest rates. Average cost of debt rose to 3.74% due to higher fixed interest rates. Management is actively negotiating the refinancing of S\$360m borrowings due in April 2025.

Stock Impact and Strategic Insights

Recovery in Retail Rents

Retail rents are recovering strongly, driven by F&B operators, health & wellness sectors, and niche areas like gaming and collectibles. Orchard Road rents increased by 4.8% year-on-year in 3Q24, supported by tourism recovery and back-to-office trends.

Multi-functional Event Space at 313@Somerset

The new multi-functional event space at Grange Road Car Park, managed by Live Nation, is expected to boost shopper traffic significantly. Construction is pending regulatory approval and is expected to commence by end-2024, with completion within 12-18 months.

Upside from Jem’s Rent Review

The lease with the Ministry of National Development for Jem’s office block is due for a rent review at end-2024, with expectations of a high single-digit rental reversion. This could enhance valuations and support potential divestment decisions.

Cost Efficiency Measures

LREIT secured a two-year electricity tariff contract for Jem and 313@Somerset, reducing utilities expenses by 30% or S\$4m-5m annually. This new rate took effect in July 2024.

Backfilling Building 3

Building 3 of Sky Complex is being repositioned as a multi-tenanted office building. With new leases secured, current occupancy is at 7%, with expectations to exceed 30% if ongoing negotiations are successful.

Valuation and Recommendations

The target price for LREIT is set at S\$0.77, based on the Dividend Discount Model (DDM) with a cost of equity of 7.0% and terminal growth of 2.2%. The recommendation remains a strong BUY due to the anticipated benefits from retail recovery, strategic developments, and cost efficiency measures.

Share Price Catalysts

• Increased shopper traffic from the new multi-functional event space at 313@Somerset.
• Development of Jurong Gateway as Singapore’s second CBD enhancing Jem’s value.

Key Financial Metrics

Key financial metrics for LREIT demonstrate stable performance and strategic management.

Portfolio Valuation

The portfolio valuation by property shows a diversified investment across key assets:

• 313@Somerset: 28%
• Jem: 62%
• Sky Complex: 10%

Occupancy and Rental Income

Occupancy for Jem and 313@Somerset has maintained stability over the years, with the latest figures showing high occupancy rates.

• 313@Somerset: Near full occupancy at 99.6%
• Jem: Fully occupied

The gross rental income by trade sector as of June 2024 is diversified, with significant contributions from Food & Beverage, Fashion & Accessories, and Broadcasting.

Debt Maturity Profile

The debt maturity profile indicates a well-structured repayment schedule, ensuring financial stability and strategic refinancing plans.

• FY25: S\$360m
• FY26: S\$290m
• FY27: S\$200m
• FY28: S\$100m
• FY29: S\$15m

Conclusion

Lendlease Global Commercial REIT (LREIT) exhibits strong fundamentals and strategic growth initiatives. With a solid portfolio, efficient cost management, and strategic developments, LREIT remains a promising investment. The recommendation to maintain a BUY rating at a target price of S\$0.77 reflects confidence in its continued performance and potential for growth.