I guess you have been to shopping malls like [email protected], JEM and Parkway Parade. Or perhaps the latest Paya Lebar Quarter (PLQ Mall). What do they have in common? Yes, they are all managed by Lendlease, one of the leading property management companies in the world. Then, what’s the difference between these malls? Well, only [email protected] is owned by Lendlease Global Commercial REIT. We will address it as a Lendlease REIT for the rest of the article.
Well, in fact the real estate investment trust is a relatively new REIT in town. The IPO closed on 30 Sep 2019 at $0.88 per unit. It started trading in the Singapore Stock Exchange (SGX) on 2 Oct 2019.
With the episode of Covid-19 sweeping across the world, it was not a very good first year for the REIT. During the market selloff in March 2020, it plunged to a low of around $0.44 per unit. At the point of writing, it is averaging about $0.65 per unit.
So, can we expect Lendlease REIT to continue to distribute stable dividends and recover to its IPO price level eventually? Let’s take a look!
Lendlease REIT Property Portfolio
Gross Revenue Breakdown
Just a quick overview, understand that Lendlease REIT’s portfolio consists of namely two properties. The first one is a retail property, [email protected] in Singapore. The second one is an office property, Sky Complex in Milan. You can see that [email protected] contributes a major share of 66.3% to the group’s topline.
Source: Lendlease Global Commercial REIT Annual Report FY2020 – Revenue Contribution
However, Covid-19 has affected the retail sector substantially more compared to the office sector. Therefore, under normal operating conditions, we should expect [email protected] to contribute more than 70% to the group’s revenue.
Singapore, [email protected]
Source: Lendlease Global Commercial REIT Annual Report FY2020 – [email protected]
I’m sure many Singaporeans or even foreign tourists will be familiar with the shopping paradise at Orchard road. Strategically located with direct access to Somerset MRT station, [email protected] definitely leaves shoppers a deep impression.
Positioned as a differentiated and experiential destination mall, [email protected] housed 142 tenants across 13 trade sectors. Food & beverage (F&B) remained the largest contributor to Gross Rental Income (GRI) at 38%, followed by fashion & accessories at 30%.
Source: Lendlease Global Commercial REIT Annual Report FY2020 – Sector Breakdown
Market Trend: E-commerce
No doubt the continued rise of E-commerce is going to put pressure on the once glorified retail properties. Real estate players will need to reshape the retail sector in order to capture traffic lost to e-retailing.
Just to give you a perspective of the threat from e-commerce, the share of total sales generated by e-commerce platforms increased considerably from 3.2% in 2015 to 5.9% in 2019 in Singapore. In fact, it is expected to continue growing to a level similar as that of the US at 11% in 2019.
However, we like the fact that management is attracting online retailers such as Love, Bonito, Pomelo and Style Theory. This will appeal to the younger generations and boost footfalls to the mall.
Market Trend: Consumer Spending Shift
Not only that, they understand the trend of the industry. There is a shift in consumer spending towards food-related retail categories. As such, we can see that Lendlease REIT has been proactively shifting tenant mix with food & beverage businesses anchoring their mall.
In fact, [email protected] has an occupancy rate of approximately 98% as of 30 June 2020. This is much higher than the average occupancy rate of 91% in Orchard Road.
In order to boost footfalls, the malls have to create experiential and activity-based concepts. This will help to entice repeat visitations and increase dwell time among patrons.
It is great to see Lendlease REIT winning the tender to redevelop the car park at Grange Road. This will expand its presence in the Somerset precinct by offering a first-of-its-kind lifestyle experience along Orchard road. It will include multiple event spaces, independent cinema and more selections of food & beverage.
Milan, Sky Complex
Source: Lendlease Global Commercial REIT Annual Report FY2020 – Sky Complex
Sky Complex comprises three Grade A office buildings in Milan. It is leased to Sky Italia, a subsidiary of Comcast Corporation, with a term of 12 + 12 years. Its lease expiry is in May 2032. Comcast Corporation is the largest broadcasting and cable television company in the world by revenue.
Note that the lease agreement gives Sky Italia an option to break the lease in 2026. While the long lease arrangement provides stable income to the portfolio, it can pose a concentration risk. This is because the entire office is dependent on a single tenant.
We saw a decline in vacancy rate from 16.5% in 2015 to 13.8% in 2019 at the Periphery submarket, where Sky Complex is located. According to Colliers International, it is expected that vacancy rate will continue its gradual decline in the coming years.
Major occupiers will continue to decentralize their offices away from prime CBD areas. Favoured places like Milano Santa Giula, where Sky Complex is, provide good quality offices at lower price points. So this market trend will be a plus point should any chance Sky Italia decide to break lease.
Source: Colliers International – Total Office Stock and Vacancy in Periphery (2015-2019)
Therefore, I believe Sky Complex will continue to provide stable income to Lendlease REIT in the foreseeable future. Albeit the concentration risk of a single tenant, Sky Italia is backed by Comcast Corporation. Thus, risk of breaking the lease should be considerably lower. Unlike Sky Complex, [email protected] suffered heavily due to the Covid-19 situation. We shall now examine the impact of the pandemic on Lendlease REIT’s portfolio.
Covid-19 Disruption On Lendlease REIT
Occupancy Rate Decline
With the rise in Covid-19 cases in Singapore, the government implemented Circuit Breaker from 7 April to 1 June 2020. Only essential stores were allowed to open during this period. Only less than 30% of [email protected] was in operation during this period. As such, the prime retail mall saw a drastic drop in footfall as well as its tenant sales.
In fact, occupancy rate decreased from 99.2% in March 2020 to 97.8% in June 2020. However, we do see momentum gathering after the Circuit Breaker. And we expect the positivity to continue, barring further restrictions or lockdown from the authorities.
Source: Lendlease REIT 4QFY2020 Results Presentation – Operating Performance
Gross Revenue & Net Property Income Impact
Nonetheless, rent waivers of up to two months were provided to retail tenants in [email protected] for Q4 FY2020. As such, we saw a drastic drop in revenue and net property income in the final quarter. Fortunately, Sky Complex continues to deliver stable rental income amidst the tough pandemic period.
Source: Lendlease REIT 4QFY2020 Results Presentation – Gross Revenue and Net Property Income
While the short-term impact in the retail sector is definite, we believe the long term prospect is still positive. Management’s strategy and approach are aligned to that of the unitholders. Strategic tenant selections can help overcome challenges from the ecommerce trends and pandemic situations. And this is what management is trying to achieve by creating more activities-based experience and higher revisitation.
Yes, travel restrictions will continue for some time, affecting prime shopping malls that depend heavily on tourists’ spendings. However, the retail sector will be more resilient compared to more vulnerable industries such as airlines and hotels. Local shoppers will return to the malls after Circuit Breaker. Moreover, restrictions on travel overseas for holidays can potentially translate to higher local spending. Therefore, retail malls will still be here to stay.
Question is if the current market price for Lendlease REIT represents an opportunity for investors?
Risks And Potentials
Weighted Average Lease Expiration of Lendlease REIT
Given the challenging business environment, the weighted average lease expiration (WALE) profile of Lendlease REIT is more important than before. It is good that they segregate it into two different formats.
This is especially important in a REIT like Lendlease. They only have 2 different properties in completely different sectors and tenant profiles. This can substantially skew the lease expiry profile depending on the measure. Retail tenants usually sign three year leases at [email protected] For the single tenant taking up Sky Complex, the lease goes for 12 years.
Source: Lendlease REIT 4QFY2020 Results Presentation – Portfolio Lease Expiry Profile
You can see that the WALE by Net Lettable Area (NLA) is 9.7years. The WALE by Gross Rental Income (GRI) is 4.9 years. Remember, [email protected] takes up the bulk of the rental income. As such, its shorter lease effect is reflected in the WALE by GRI. Hence, WALE by GRI shows a more realistic profile for investors to assess.
Nevertheless, the lease expiries seem to be evenly distributed across the next few years. Such management of the lease expiry profile will help reduce the risk of any significant expiries in a particular year.
We see that there will be a substantial 17% of the lease, based on GRI, expiring in FY2021. But we think that the renewal will be strong given it’s high retention rate of about 87%. In addition, [email protected] is strategically located in a prime spot. We believe that management will be able to secure new tenants, for any replacement relatively, easily.
Net Asset Value of Lendlease REIT
The valuation of [email protected] and Sky Complex stand at S$1.08 billion and S$434.6 million respectively. This gives Lendlease REIT’s portfolio a total value of about S$1.44 billion. After deducting away its liabilities, its remaining equity will be worth about S$992 million. Dividing it by the outstanding shares, we get the net asset value (NAV) per unit at S$0.85.
Source: Lendlease REIT 4QFY2020 Results Presentation – Net Asset Value Per Unit
At the current market price of around S$0.65, it represents more than 20% discount to its per unit NAV. We believe that its portfolio contains reasonably good properties. Based on the analysis above, the REIT’s market price should eventually equilibrate upwards to its IPO price of S$0.88. Therefore, there is still a reasonable margin of safety of more than 20% to invest at the current rate.
Dividends Distribution By Lendlease REIT
Since REITs in Singapore are required to distribute most of its income, dividend yield is definitely something to look into. It was forecasted during the IPO that the distribution per unit (DPU) was expected to be around 3.8 cents.
However, the actual DPU came in at only 3.05 cents for the whole of FY2020. The significant drop was attributed mainly to the rental waiver provided to tenants in [email protected] This is to help them cope with the drastic reduction in business during the Circuit Breaker in Singapore.
Source: Lendlease REIT 4QFY2020 Results Presentation – Financial Performance
Well, the pandemic will definitely affect your dividend yield in the near term. However, once Lendlease REIT recovers to pre-Covid19 rental income level, you will essentially be attaining a dividend yield of 5.8%.
Other Key Financial Indicators Of Lendlease REIT
Finally, let’s take a look at some other key financial indicators to ensure that there is no sign of distress.
Source: Lendlease Global Commercial REIT Annual Report FY2020 – Key Highlights
As of 30 June 2020, the gearing of Lendlease REIT amounted to 35.1%. This is a pretty average gearing for REITs in Singapore, and below the gearing limit of 50%. Thus, we can say that the REIT is not over-leveraged given its average debt to asset ratio of 35.1%.
The REIT’s interest coverage ratio is 9. This means that its earnings can be more than sufficient to cover its interest expense by 9 times. Thus, it has no issue to meet its interest obligation in the short to medium term.
Lendlease REIT has an average debt maturity of 3.1years, meaning it does not have any refinancing requirement until FY2023. Generally, REITs try to lock in debt with low interest rates for a longer duration. This is to reduce the risk in a rising interest environment. We see no issue for this case, especially with the low interest environment for the foreseeable future.
Source: Lendlease REIT 4QFY2020 Results Presentation – Key Highlights
To conclude, Lendlease REIT holds reasonably good properties in its portfolio. It should stand to experience full recovery of its rental income and distribution to its unitholders eventually.
Moreover, the REIT has a very strong sponsor, Lendlease Group. There can be potential injection of valuable properties into Lendlease REIT in the future. For instance, the group’s portfolio includes the Grade A offices at Paya Lebar Quarter and office tower at JEM in Singapore.
While it is not going to generate a 20% return, it can provide a steady dividend yield of 5 – 6%. Furthermore, given the market price is at a discount to its NAV currently, we believe it is a decent investment. Lendlease REIT holds good and stable assets, hence, the downside risk is low. For those looking for stable and passive dividends, you can consider adding some units of the REIT into your portfolio.
If you like what we have shared, join our community to get exclusive stocks recommendations and content 🙂