Lendlease Global Commercial REIT (LREIT) may have been awarded the tender to redevelop the 48,200 sq ft car park at Grange Road next to its retail mall 313@Somerset, but slower completion of this event space and a lower overall net property income (NPI) margin have forced CGS International Research analyst Lock Mun Yee to cut her target price to 69 cents from 71 cents previously.
Still, Lock is staying “add” on LREIT following the release of its results for 1HFY2025 ended Dec 31, 2024.
LREIT’s revenue and NPI declined 13.6% and 19.8% y-o-y to $103.6 million and $74.9 million in 1HFY2025 respectively. This was due to the absence of supplementary rent from the lease restructure of LREIT’s Milan office property Sky Complex, though it was partially cushioned by the higher Singapore contributions.
1HFY2025 distribution per unit (DPU) plunged 14.3% y-o-y to 1.80 cents on higher interest expense and a larger unit base due to its dividend reinvestment plan.
NPI margin dipped to 72.3% in 1HFY2025 from 74.8% in FY2024 due to higher property expenses from the equipment replacement at Sky Complex and higher operating expenses and provisions for rental arrears in Singapore, which was partly offset by utility savings in Singapore.
Phillip Securities Research analyst Liu Miaomiao also cut her target price on LREIT to 74 cents from 76 cents previously. Liu says the sharp drop in DPU was in line with estimated, forming 48% of her full-year forecast.
See also: Lendlease Global Commercial REIT posts 14.3% decline in 1HFY2025 DPU to 1.8 cents
Occupancy uptick
LREIT’s retail portfolio occupancy was high at 99.9% at end-1HFY2025. Retail tenant sales fell 5.2% y-o-y in 1HFY2025, impacted by an increase in outbound travel due to the strong Singapore dollar and asset enhancement works at Food Republic at 313@Somerset.
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Nonetheless, rental reversions were a “robust” 10.7%, notes Lock, underpinned by Jem — with reversion in the low teens — and 313@Somerset’s reversion in the high single-digits.
During a Feb 4 analyst briefing, management guided for retail rental reversions to remain at high single digits in FY2025.
Management also indicated that the rent review for office space at Jem should be concluded by end-February, says Lock.
The anticipated positive outcome should lift contributions from Jem’s office from 2HFY2025 onwards, according to management.
In 1HFY2025, LREIT lifted the committed occupancy at Building 3 of Sky Complex to 31% from 8.1% in March 2024. That said, it expects cash contributions from the new leases to commence from FY2026 after the rent-free period.
Construction of the multifunctional event space adjacent to 313@Somerset has commenced and is scheduled to be completed in 2H2026. It will boast a seating capacity of 3,000 pax.
Focus on capital management
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LREIT’s gearing was stable at 40.8% at end-1HFY2025, while average cost of debt dipped 17 basis points to 3.57% over the same period.
However, adjusted interest coverage ratio (ICR) slid to 1.5 times in 1HFY2025. To improve this ratio, apart from the anticipated higher contributions from Jem office, management indicated it is exploring various refinancing methods for its existing $200 million perpetual securities, which have a call date in April.
These methods include debt, issuing new perpetual securities or a mix of both. Management says it may also consider asset divestments; LREIT says it is in talks with prospective investors for the sale of the JEM office.
Phillip Securities’ Liu says LREIT is actively engaging with several funds and ultra-high-net-worth individuals to finalise a deal before the end of 2025. “While we anticipate a slight discount to its book value of $450 million due to the high valuations of Singapore assets, management still expects a positive yield from the divestment.”
Lock believes LREIT’s FY2025F dividend yield of 7.2% has already priced in near-term capital management risks.
Potential re-rating catalysts include the faster backfilling of Sky Complex Building 3 and divestment of Jem, which should restore the REIT’s ability to grow inorganically, says Lock.
Downside risks, however, include weak rental reversions and a slowdown in consumer spending, which could hurt LREIT’s ability to price rents.
Liu says: “While FY2025 earnings are expected to benefit from low-teens rental reversion of both Singapore retail and Jem office, DPU growth may be constrained by uncertainty surrounding the interest rate cut trajectory.”
As at 3.45pm, units in LREIT are trading 1 cent lower, or 1.86% down, at 53 cents.
Table: CGSI
