Date of Report: October 3, 2024
Broker Name: Lim & Tan Securities Pte Ltd
Financial Performance in FY2024
Lendlease REIT reported a 7.8% year-on-year (YoY) increase in gross revenue for FY2024, totaling S$220.9 million. This was primarily driven by the strong operational performance of its Singapore portfolio and the upfront recognition of supplementary rent from the lease restructuring of Sky Complex. Despite higher property expenses, which rose to S$55.6 million due to increased property tax and utility costs in the Singapore portfolio, the net property income (NPI) grew by 7.4% YoY, reaching S$165.3 million.
On a proforma basis, excluding the supplementary rent recognized in advance, the gross revenue and NPI grew by 3.2% and 1.3% YoY, respectively.
Impact of Borrowing Costs
Lendlease REIT faced a 32.8% increase in full-year borrowing costs, amounting to S$68.2 million. This increase was largely driven by higher interest rates and the replacement of the Euribor hedge with a higher fixed rate. Additionally, the borrowing costs in FY2024 reflect the full-year impact of interest expenses linked to the acquisition of a 10% stake in PPP in June 2023.
As a result, the distributable income for FY2024 decreased by 15.6% YoY, totaling S$91.4 million. The distribution per unit (DPU) declined by 17.7% YoY to 3.87 cents, mainly impacted by higher borrowing costs and an enlarged unit base.
Strategic Lease Restructuring at Sky Complex
In December 2023, Lendlease REIT successfully completed a strategic lease restructuring exercise for Sky Complex, a portfolio of three Grade A commercial buildings in Milan. The restructuring aimed to mitigate tenant concentration risk, as the complex was previously fully leased to Sky Italia until 2032, with a pre-termination option in 2026.
Following the restructuring, Buildings 1 and 2 remain tenanted by Sky Italia until January 2033 without pre-termination rights, securing long-term stable cash flow. Additionally, the annual rent for Buildings 1 and 2 increased by approximately 1.5%. Building 3 is currently being repositioned for multi-tenancy.
Occupancy and Rental Performance
Lendlease REIT achieved a positive rental reversion in its retail portfolio, with a 14.0% increase as of June 30, 2024. The portfolio’s tenant retention rate stood at 84.9% by net lettable area (NLA). Approximately 98% of the retail leases (by NLA) have contractual rental step-ups during their lease terms, contributing to revenue growth.
As of June 30, 2024, the committed portfolio occupancy rate stood at 89.1%, compared to 99.9% in the previous year. The decline was attributed to the lease restructuring at Sky Complex. The retail portfolio achieved full occupancy, while the office portfolio’s occupancy was at 80.9%.
Key Tenants and Lease Expiry
Lendlease REIT’s portfolio features long-weighted average lease expiries (WALE). Its Singapore office is fully leased to the Ministry of National Development (MND) until 2044, while Buildings 1 and 2 in Milan are leased to Sky Italia until 2033.
As of June 30, 2024, Lendlease REIT had 411 tenants across 21 trade sectors, with 57% of its retail gross rental income (GRI) coming from essential services. The top 10 tenants contributed 36% of the portfolio’s GRI.
Valuation and Market Metrics
The portfolio’s total valuation as of June 30, 2024, was S$3,682.4 million. However, Sky Complex’s valuation declined by 10.9% to S$382.1 million, mainly due to an increase in terminal capitalization rates and higher upfront capital expenditure for repositioning Building 3. Despite this decline, Sky Complex only accounted for about 10% of Lendlease REIT’s total portfolio value. The decrease in Sky Complex’s valuation was offset by increases in the valuations of the REIT’s Singapore assets.
Lendlease REIT’s market capitalization stands at S$1.5 billion. It trades at 25.3 times forward price-to-earnings (P/E) and 0.7 times price-to-book (P/B), offering a dividend yield of 6.2%. The consensus target price is S$0.73, representing a 15.9% upside from the current share price.
