Maybank Research Pte Ltd
May 9, 2025
Lendlease Global Commercial REIT: Navigating Steady Performance Amidst Gearing Focus
Lendlease Global Commercial REIT (LREIT SP) has delivered a steady operational performance according to its recent 3Q business update. The new management team is prioritizing portfolio optimization and enhancing financial flexibility, primarily through reducing gearing. While portfolio occupancy remains high, it saw a slight sequential dip, mainly attributed to lower occupancy at 313@somerset. Positive rental reversion continues, although tenant sales are showing signs of normalization. Gearing remains elevated despite a sequential decrease due to recent debt repayments, and management is keenly focused on addressing this. Debt costs have seen a slight reduction.
Operational Resilience and Portfolio Dynamics
LREIT’s portfolio occupancy stood at 92.1% in 3Q, a marginal decrease from 92.3% in the previous quarter. This dip was primarily driven by a slight fall in retail occupancy to 99.5% (from 99.9%), specifically at 313@somerset, which recorded 98.8% occupancy compared to 99.9% in 2Q. Office occupancy, however, remained stable at 86.6%. The pre-committed occupancy for Building 3 at Sky Complex in Milan was unchanged at 31%.
The REIT continued to achieve positive retail reversion, with the year-to-date figure at +10.4%, a slight moderation from +10.7% in the first half of the year. Prime suburban asset Jem achieved a slightly higher reversion rate than the overall portfolio average. A notable positive development was the completion of the rent review for Jem office, resulting in a rental uplift of approximately 13%.
Tenant sales across the retail malls moderated, showing a 5.1% year-on-year decrease year-to-date. Looking ahead, management has guided for a moderation of positive retail reversion to the low to mid-single digit range for the next financial year. LREIT has also secured Shaw Theatres as a new tenant for Jem, replacing Cathay Cineplex, at a similar rent level. Revenue from this new tenancy is expected to commence from the second half of calendar year 2026.
Financial Health and Management Priorities
Reported gearing improved sequentially to 38.0% in 3Q from 40.8% in 2Q, primarily due to debt repayment funded by perpetual securities proceeds. However, the normalized gearing stands at approximately 43% following the draw down of debt to repay SGD200 million of maturing perpetual securities last month. The interest coverage ratio remained unchanged at 1.5x. The cost of debt saw a slight decrease to 3.54% from 3.57% in the previous quarter, attributed to repayments and lower base rates. The proportion of fixed-rate borrowings increased to 76% from 70%.
Management’s core focus is on lowering gearing. They highlighted potential upside to the interest coverage ratio (currently below 1.8x) from the Jem office lease uplift and anticipated interest cost savings from repricing floating debt and repaying higher-cost debt. Asset recycling is a key strategy being explored to raise capital and reduce gearing, although a specific timeline for such activities has not yet been shared.
Development of a multi-functional event space at 313@somerset has begun and is slated for completion in the second half of 2026.
Valuation and Outlook
Given the limited disclosure of detailed financials in the 3Q update, the analyst has maintained the existing estimates and the Dividend Discount Model (DDM)-based target price of SGD 0.50. The valuation employs a 3-stage DDM with a cost of equity of 7.5%.
Despite the REIT trading at what is considered a reasonable valuation (6.5% FY25e yield, 0.6x Price-to-Net Asset Value), the HOLD rating is maintained. This stance is attributed to several factors, including elevated gearing (even when accounting for perpetual securities), a potential income vacuum related to The Sky Complex, and the expectation of a potentially lower rate of rental reversion or higher vacancy rates for the malls.
Key Risks and Opportunities
Upside Factors:
A strong economic and tourism rebound could lead to significant growth in rents for Jem retail and 313@somerset malls.
Successful capital recycling initiatives and a strategic shift towards a Singapore pure-play positioning could enhance value.
Benign macroeconomic conditions could favorably impact the refinancing of perpetual securities and overall cost of debt.
Downside Factors:
Elevated gearing levels and rising cost of funding pose significant financial risks.
Elevated funding costs could complicate the redemption of perpetual securities.
The give-up of space or non-renewal of leases by anchor tenants in office assets in Italy and Singapore could negatively impact income.
Dilutive transactions undertaken to manage gearing or fund acquisitions.
A potential income vacuum from The Sky Complex.
Slower-than-expected retail sales growth.
Company Profile and Value Proposition
LREIT is a real estate investment trust focused on investing in a diversified portfolio of stabilized income-producing commercial properties globally, specifically in Singapore and Italy. Its assets under management (AUM) stand at SGD3.6 billion, with a net lettable area (NLA) of 2.2 million sq. ft.
The portfolio AUM breakdown as of March 2023 was approximately:
Jem, SG office and retail: 59%
313@somerset, SG prime retail: 28%
Milan Grade A office: 13%
The sponsor, Lendlease Group (LLC ASX), is an international property and infrastructure group with a substantial development pipeline (AUD121b) and funds under management (AUD48b) as of December 2022. LREIT is seen as having the potential to evolve into a Singapore-centric commercial real estate play, leveraging its sponsor’s significant local development pipeline.
ESG Leadership
LREIT demonstrates strong leadership in Environmental, Social, and Governance (ESG) aspects. It was the first S-REIT to achieve net-zero carbon emissions in 2022, three years ahead of its target, and holds the highest tier five-star GRESB rating for ESG. The REIT maintains BCA Green Mark Platinum status for its properties. It is committed to “Mission Zero,” aiming for net-zero carbon (Scope 1 & 2) by 2025 and absolute zero carbon (Scope 1, 2 & 3) by 2040. Sustainability-linked loans and derivatives obtained in FY22 are expected to generate net interest savings. The REIT has exceeded environmental targets for energy/water consumption, emissions intensity, and waste reduction. Notably, 313@somerset is Singapore’s first mall with 100% green leases.
In governance, LREIT, as an externally managed REIT, benefits from its sponsor’s pipeline and access to capital markets. The board exhibits high independence and diversity, with 3 out of 5 members being independent and 2 being women. Independent directors chair the Audit and Risk, and Nomination and Remuneration Committees. The management fee structure aligns with peers. The manager has successfully grown AUM significantly since IPO, partly through increasing stakes in Jem and applying a similar strategy for Parkway Parade. LREIT is included in several key indices and ranked highly on the Singapore Governance and Transparency Index 2022.
Social initiatives focus on health & safety, training, diversity, and community engagement. The REIT reported no work-related injuries in FY22. The property manager is bizSAFE partner certified. Employee satisfaction with training programs is high, and the workforce shows good gender diversity (55% female employees in the manager). A significant portion of employees volunteered in community projects.
Financial Performance and Key Ratios
The report provides historical and forecast financial data and key ratios:
FYE Jun (SGD m) FY23A FY24A FY25E FY26E FY27E
Revenue 204.9 220.9 208.7 210.6 224.6
Net property income 153.9 165.3 149.6 153.0 163.4
Core net profit 108.2 88.2 76.5 77.5 91.0
Core EPU (cts) 4.7 3.8 3.2 3.2 3.7
Core EPU growth (%) (52.2) (20.2) (15.1) (0.6) 15.4
DPU (cts) 4.7 3.9 3.3 3.3 3.8
DPU growth (%) (2.4) (17.7) (14.0) (0.6) 14.7
P/NTA (x) 0.7 0.6 0.5 0.6 0.6
DPU yield (%) 7.1 6.9 6.6 6.6 7.5
ROAE (%) 6.6 4.1 4.4 3.6 4.2
ROAA (%) 2.9 2.3 2.0 2.0 2.4
Debt/Assets (x) 0.40 0.40 0.40 0.40 0.40
Consensus DPU – – 3.7 3.9 3.8
MIBG vs. Consensus(%) – – (9.3) (15.2) (0.2)
Key Ratios Highlights (FY23A-FY27E):
Price/DPU ranges from 13.3x to 15.3x.
P/BV and P/NTA remain relatively stable between 0.5x and 0.8x.
DPU yield is forecast between 6.6% and 7.5%.
Net property income margin is stable around 71-75%.
Core net profit margin is forecast between 36-41%.
Payout ratio is elevated, forecast between 99.8% and 122.8%.
Net gearing (excluding perps) is forecast to remain high, around 65-68%.
Net interest cover is forecast between 1.8x and 2.6x.
Debt/EBITDA is forecast between 10.7x and 12.0x.
The forecast DPU of 3.3c for FY25 and FY26 represents a significant decrease from the FY22 DPU of 4.70c, primarily due to higher borrowing costs. The forecast debt cost (excluding amortization) is expected to increase from 2.51% in 3QFY23 to 3.5% in FY24. Passing rents for Jem retail and 313@somerset malls are projected to rise by 4-7% in FY24-FY25. LREIT has SGD400 million of perpetual securities with the first call date in April 2025, which was addressed recently.
