“Assuming the agreed property value remains unchanged at $885 million or $2,789 psf, the 30% stake would be worth $265.5 million and provide an NPI yield of 4.5%,” states Koh.
The analysts see the acquisition could be funded through a mixture of equity and bank loans to ensure LREIT’s aggregate leverage stays below 40%.
“We estimate debt headroom at $107 million based on aggregate leverage of 40%. LREIT could consider launching equity fund raising through a small preferential offering to raise between $100 million and $150 million, which maintains aggregate leverage at between 38.7% and 39.9%. Its cost of new debt is currently at the high end of 2% and we expect the transaction to be DPU accretive,” explains Koh.
In terms of enhancing tenant mix at PLQ Mall, Koh states that LREIT’s management intends to embark on AEI to reconfigure NLA of around 16,000 sq ft at Level 1 & 2 in 2026, which could provide uplift to rental rates. The capex required is estimated to be at $10 million.
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LREIT also intends to convert the holding company for PLQ Mall into a Limited Liability Partnership over the next 3-6 months, thereby obtaining tax transparency for PLQ Mall.
Potential divestment of Sky Complex on a piecemeal basis: Koh
Koh notices that LREIT has continued to backfill vacant space at Sky Complex Building 3, albeit at a gradual pace.
The analyst points out that LREIT’s management could consider divesting Building 1 & 2, which is fully occupied by Sky Italia, a subsidiary of Comcast Corp.
“Strong credit standing of Comcast, which is rated A- with a stable outlook by Standard & Poor’s and Fitch Ratings, would attract potential buyers. Building 3 could be divested at a later stage after backfilling the bulk of vacant space,” adds Koh.
Valuation upside for Jem
In his report, Koh also highlights that he sees potential upside from the revaluation of Jem, which is located at Jurong East MRT station.
“The higher valuation is supported by recent sales of The Clementi Mall. The Elegant Group acquired The Clementi Mall from Cuscaden Peak Investments for $809 million or $4,100 psf, which is 8% higher than the indicative guide price of $750 million,” says Koh.
According to Koh, with a current valuation of $2,299 million or $2,574 psf, this is substantially lower than the pricing for The Clementi Mall.
Based on the analyst’s calculations, an increase in valuation for Jem by $447 million or $500 psf would reduce LREIT’s aggregate leverage by four percentage points.
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Singapore-focused strategy for LREIT
In Koh’s summary, he explains that LREIT possesses competitive advantage through quality assets with precinct dominance.
“Its assets have a long balance leasehold tenure of 83 years. Its sponsor has more than 50 years of presence and a pipeline of more than $6 billion in Singapore, which includes PLQ Office, Parkway Parade and Comcentre,” states Koh.
“Current valuation is attractive based on DPU yield. LREIT provides an attractive FY2026 DPU yield of 6.3%, compared to CICT’s DPU yield of 4.9%, FCT’s DPU yield of 5.6% and the broader S-REIT’s DPU yield of 6.6%,” concludes Koh.
Therefore, Koh is maintaining a “buy” call on LREIT with a target price of 81 cents, which is based on dividend discount model with cost of equity at 6.75% and terminal growth of 2.2%.
LREIT units were trading at 62 cents on Jan 6 at around 11.07am, with nearly 2 million units changing hands.
