I Would Invest in Lendlease Global Commercial REIT If…

Lendlease Global Commercial REIT (SGX: JYEU) is one of the newest REIT in Singapore market that got listed just four months ago in Oct 2019. Its Initial Public Offering at $0.88 per share (an auspicious price) was well-received with much fanfare, with its public offering 14.5 times oversubscribed. According to The Business Times, the subscription rate was the highest for a REIT in the past 5 years, showing that it was extremely popular with retail investors.  

I applied for the IPO but was unsuccessful in receiving any units unfortunately.

LREIT has just announced its inaugural earnings as a public company on 10 Feb. Having missed the opportunity to purchase this REIT during the IPO, I read through its Q2 earnings with great interest.

Here are the key things to note about LREIT earnings as part of your investment research.

Property Portfolio

LREIT’s asset portfolio comprises 2 properties located in Singapore and Milan, namely 313@Somerset and Sky Complex.

The former is a prime retail property located at Orchard Road, the main shopping district of Singapore. Singaporeans would all be familiar with this property as it is one of the key malls sitting right atop Somerset MRT. Whereas Sky Complex is primarily an office property made up of three office buildings fully leased to Sky Italia, an Italian satellite television platform owned by Comcast Corporation.

Snapshot of LL REIT’s asset portfolio. Source: LREIT Q2 FY2020 Earnings Presentation

Collectively, the assets are worth $1.39 billion, with 313@Somerset taking up 71.6% ($1 billion) of the total portfolio value, and Sky Complex constituting the remaining 28.6%.

As of 31 Dec 19, both properties enjoy high occupancy rate: 313@Somerset’s committed occupancy rate stood at 99.2% while Sky Complex has a 100% occupancy rate.

Profit and Loss

Source: LREIT Q2 FY2020 Earnings Presentation

LREIT’s Q2 actual results performed better than forecast. Its Gross Revenue of $21.4 million is 1% higher than forecast, while Net Property Income of $16.1 million is 3.2% higher. This has brought about a Distributable Income of $15 million.

Investors would be delighted to see that its Distribution of 1.29 cents beat forecast by 3.1%.

Balance Sheet and Gearing

Source: LREIT Q2 FY2020 Earnings Presentation

With a Gross Borrowings of $529.2 million, LREIT’s Gearing Ratio stood at 34.9% as of 31 Dec 2019. In comparison with other retail and hybrid REITs with commercial and retail assets such as Frasers Centrepoint Trust, Suntec REIT, Mapletree Commercial Trust with gearing ratio of 32.9%, 37.7% and 33.1%, LREIT’s gearing does not seem excessive.

It is also worth noting that its Interest Coverage of 10.8 times is very healthy. This means that LREIT would have no issue servicing its loan interest using its earnings and cashflow.

Source: LREIT Q2 FY2020 Earnings Presentation

Its Debt Maturity Profile also shows a healthy picture, based on the fact that there are no maturing loans to be refinanced up till FY2022. This should allay concerns on possible rising interest rate affecting LREIT’s distribution in the next few years.

NAV

According to its Q2 earnings, LREIT has a Net Asset Value of $0.82. Based on closing share price on 7 Feb 2020 of $0.9, investors are paying a premium of Price to NAV 1.09 per share. This is something to ponder about as market is assigning a premium valuation above LREIT’s NAV, in today’s market condition that is very much uncertain.

Portfolio Details

Source: LREIT Q2 FY2020 Earnings Presentation

The portfolio lease expiry profile is evenly spread out, with not more than 19% of lease based on Gross Rental Income (GRI) expiring up till FY2024. This should provide some stability to the rate of rental renewal and reduces the risk of sharp rental drop in any particular year.

I find the Trade Sector breakdown interesting. Broadcasting is a unique trade sector that I do not see much of in other local REITs. It actually strengthens the entire tenants’ profile, as Broadcasting is relatively less susceptible to the impact of economic boom and bust, compared to financial services and fashion etc. Furthermore, a television broadcasting facility requires high specifications fitting and features. It is less straightforward for a satellite broadcasting firm to move its studios to another office, as compared to normal companies that occupy office spaces for routine functions. This probably also explains the long lease term of Sky Italia up till year 2032.  

Strengths and Opportunities

One of the key strengths of LREIT is its tenancy with Sky Italia. With 30% of Gross Rental Income coming from a tenant with large parent company, in a defensive sector, the tenancy profile of LREIT is more resilient than the typical commercial or retail REIT. Couple it with the triple net lease structure with Sky Italia and annual rental step-up based on 75% of consumer price index compiled by Italian National Institute of Statistics, LREIT’s operational costs is minimised with a highly certain rental escalation mechanism.

Management also shared that the permissible plot ratio for 313@Somerset has been increased from 4.9 to 5.6 in the Master Plan 2019, resulting in a potential increase of 1,008 square metre of gross floor area. This will be the catalyst to look out for that could boost revenue growth from 313@Somerset.

Weakness

Ironically, despite 313@Somerset being a prominent shopping mall with direct access to MRT station, I view it as the key weakness of LREIT. The lacklustre retail sales by Orchard Road merchants are old news that have been reported since few years ago. Despite several rounds of discussions and efforts to rejuvenate Orchard Road, personally it seems to have limited impact. Orchard Road has lost the buzz that it enjoyed 10 years ago.

With the latest round of Orchard rejuvenation plan, Somerset sub-precinct would be developed into a youth-oriented hub with vibrant lifestyle options. I will monitor closely Somerset’s development as a key factor of 313@Somerset’s success.

Valuation

Considering LREIT’s closing share price on 7 Feb of $0.9 being close to its IPO price of $0.88, lets take its annualised distribution yield based on IPO price as a proxy. Taking into consideration the latest distribution of 1.29 cents, the annual yield would be 5.86% according to its earnings report.

This is actually quite a good yield, being considerably higher than my minimum required yield of 5.5%.

Conclusion

It is still early days for LREIT, considering it recently listed in Oct 19. Despite that, based on its first quarterly earnings as a public company, I discovered several key strengths that made me include it into my watch list. These factors include a unique tenant mix, a high occupancy rate, long lease term with Sky Italia with annual rental step-up, and a more-than-satisfactory current yield.

As of now, I would not buy into LREIT yet, as I would like to see sustained performance in its next two quarters’ earnings. If it continues to show good results like its Q2 report, I will start buying into its shares.

Alternatively, if its share price drops to the range of $0.85, giving it an annualised yield of 6%, I will also start buying its shares, as a yield of 6%, in my opinion, sufficiently compensates me for the risks I bear in owning LREIT.

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