Overview of Lendlease Global Commercial REIT

Lendlease Global Commercial REIT (LREIT) is a real estate investment trust focusing on income-producing commercial properties globally. With an AUM of SGD 3.6 billion and a net lettable area of 2.2 million sq. ft., the REIT is strategically positioned to tap into both suburban and prime retail and office segments in Singapore and Italy. Sponsored by the international property group Lendlease, LREIT benefits from strong backing with a development pipeline of AUD 121 billion and AUD 48 billion of funds under management as of December 2022. It has received accolades for its commitment to ESG, being the first SREIT to achieve net-zero carbon emissions in 2022, and consistently ranks high on governance indices like GRESB.

Key Financial Highlights

The REIT reported a 1H FY2025 distribution per unit (DPU) of SGD 1.8 cents, reflecting a +1.7% half-on-half (HoH) growth but a -14.3% year-on-year (YoY) decline. Total revenue for the period was SGD 103.6 million (-13.6% YoY), while net property income (NPI) stood at SGD 74.9 million (-19.8% YoY). The decline in NPI was mainly attributed to the absence of supplementary rental income from the lease restructuring of the Sky Complex in Italy. Adjusted revenue was up 0.4%, but margins were impacted by provisions for Singapore malls and one-off equipment replacement expenditures at the Sky Complex.

Portfolio occupancy increased to 92.3% from 89.5% in the prior quarter, bolstered by higher committed occupancy of 31% for Sky Complex Building 3. Retail rent reversion was positive at +10.7% year-to-date (YTD), led by Jem’s low-teen growth and 313@Somerset’s high single-digit improvement. Tenant sales have normalized at approximately 5% growth, while Jem office rent reversion is expected to hit low teens upon finalization this quarter.

Debt and Gearing Management

LREIT’s gearing ratio remained stable at 40.8%, with the cost of debt unchanged at 3.57%. Adjusted interest coverage stood at 1.5x. Management is actively exploring refinancing options for upcoming perpetual securities to shore up coverage ratios, even if it may temporarily elevate gearing levels. Additionally, construction has commenced on a multifunctional event space adjacent to 313@Somerset, expected to be completed by the second half of 2026.

Valuation and Forecasts

Maybank Research has revised its forecasts and target price (TP) for LREIT, lowering the DDM-based TP from SGD 0.70 to SGD 0.65, but maintaining a “BUY” recommendation. The valuation factors in a lower DPU projection for FY2025 and FY2026 at SGD 3.36 cents and SGD 3.37 cents, respectively, reflecting a 6.6% downgrade. Despite the adjustments, the REIT offers a compelling yield of 6.2% and trades at a 40% discount to its book value, making it an attractive option for investors.

Risks to Consider

Potential risks include slower-than-expected retail sales growth, income voids from The Sky Complex, elevated gearing, and dilutive asset transactions. Additionally, rising borrowing costs may present challenges in refinancing perpetual securities.

ESG Leadership and Initiatives

LREIT has demonstrated strong ESG performance, achieving net-zero carbon emissions in 2022, three years ahead of its target. It has also secured SGD 960 million in sustainability-linked loans and SGD 335 million in sustainability-linked derivatives, expected to generate net interest savings. Its flagship property, 313@Somerset, has implemented green leases in 100% of its agreements, setting a benchmark for sustainability in retail real estate.

Operational Metrics

Retail occupancy remained high at 99.9%, while office occupancy saw incremental improvements. NPI margins for Singapore assets stood at 73.3%, whereas Italy’s margins were lower at 61.3% due to equipment replacement costs. YTD retail rent reversion was strong at 10.7%, but tenant sales growth declined by 5.2% YoY.

Conclusion and Recommendation

Lendlease Global Commercial REIT offers a robust investment proposition backed by strong operational metrics, ESG leadership, and potential upside from tourism growth in Singapore. While challenges such as higher financing costs and gearing persist, the REIT’s attractive valuation and stable yield make it a compelling choice for investors. Maybank Research reiterates its “BUY” recommendation with a price target of SGD 0.65, indicating a 20% upside potential.