Lendlease Global Comm REIT (LREIT SP): Steady 3Q Performance, Gearing Focus – Maybank Research

Maybank Research Pte Ltd May 9, 2025
Lendlease Global Commercial REIT: Navigating Steady Performance and Gearing Focus

Lendlease Global Commercial REIT (LREIT SP) has demonstrated steady operational performance, according to its latest business update. The new management team is prioritizing portfolio optimization and strengthening the REIT’s financial flexibility, primarily through reducing gearing.

While overall portfolio occupancy remains high, it saw a slight sequential dip, mainly attributable to lower occupancy at 313@somerset. Positive rental reversion continued, although tenant sales have begun to normalize. Gearing remains elevated, despite a slight decrease reported due to debt repayment from perpetual securities proceeds. Debt costs have seen a marginal reduction due to repayments and lower base rates. Management’s stated primary focus is on bringing down the gearing level.

The analyst maintains a HOLD rating on LREIT, citing limited financial disclosure for the quarter and leaving estimates and the DDM-based target price unchanged at SGD 0.50. Despite what is considered reasonable valuation (6.5% FY25e yield, 0.6x PB), the high gearing (including perpetual securities), potential income gap from The Sky Complex, and anticipated moderation in positive reversion or potential increase in mall vacancy are key factors underpinning the HOLD recommendation.

Operational Performance Remains Resilient

LREIT’s portfolio occupancy stood at 92.1% in 3Q FY25, a slight decrease from 92.3% in the previous quarter. This decline was primarily driven by a dip in retail occupancy to 99.5% (from 99.9% in 2Q FY25), specifically at 313@somerset, which saw its occupancy fall to 98.8% from 99.9%.

Office occupancy remained stable quarter-on-quarter at 86.6%. The pre-committed occupancy for Building 3, Sky Complex in Milan, also held steady at 31%.

Rental reversion continued to be positive, with the year-to-date (YTD) retail reversion reported at +10.4%, a slight moderation from +10.7% in 1H FY25. Jem, the prime suburban asset, achieved a reversion rate slightly higher than the portfolio average. The rent review for Jem office resulted in a positive rental uplift of approximately 13% YTD.

Tenant sales for the retail malls moderated, showing a 5.1% year-on-year decline YTD. In a notable development for Jem, LREIT has signed Shaw Theatres as a new tenant, replacing Cathay Cineplex. The new tenancy is expected to commence revenue contribution from 2H CY26 at a similar rent level.

Looking ahead, management guidance suggests a moderation of positive rental reversion to the low to mid-single digit range for the next financial year.

3Q FY25 Business Update Highlights

Financial Position and Management Priorities

LREIT reported a gearing of 38% in 3Q FY25, down from 40.8% in 2Q FY25. This reduction was attributed to debt repayment utilizing proceeds from perpetual securities. However, the normalized gearing figure is approximately 43%, reflecting debt drawn down last month to address SGD200 million of maturing perpetual securities. The interest coverage ratio remained unchanged at 1.5x, while the cost of debt slightly decreased to 3.54% from 3.57%.

Management is focused on improving financial flexibility. They highlighted potential upside to the interest coverage ratio (currently below 1.8x) from the Jem office lease uplift and potential interest cost savings from repricing floating rate debt and repaying higher-cost debt. A key priority for management is lowering gearing, with a focus on asset recycling to raise capital, although a specific timeline for these initiatives has not yet been shared.

Development of a multi-functional event space at 313@somerset has commenced and is slated for completion in 2H CY26.

Valuation and Risks

The analyst values LREIT using a 3-stage dividend discount model (DDM) with a cost of equity of 7.5%. Given the limited financial disclosure for the quarter, the previous estimates, HOLD rating, and DDM-based target price of SGD 0.50 are maintained.

Despite what is considered a reasonable valuation, reflected in a 6.5% FY25E dividend yield and a 0.6x Price-to-Book (P/B) ratio, the HOLD recommendation is maintained due to several factors:

• High gearing, even when including perpetual securities.
• Potential income vacuum from The Sky Complex.
• Potential for a lower rate of positive rental reversion or higher vacancy rates in the retail malls going forward.

Key risks identified for LREIT include:

• Slower-than-expected retail sales growth.
• Income vacuum from The Sky Complex.
• Elevated gearing and rising cost of funding.
• Elevated cost of funding complicating the redemption of perpetual securities.
• Anchor tenants in office assets in Italy and Singapore giving up space or not renewing leases.

Company Profile and Key Metrics

LREIT is a real estate investment trust that invests in income-producing commercial properties globally. Its portfolio includes suburban and city centre retail and office assets in Singapore and Italy. As of March 2023, the REIT had an Asset Under Management (AUM) of SGD3.6 billion with a Net Lettable Area (NLA) of 2.2 million sq. ft.

The AUM breakdown by asset (March 2023, SGD3.6 billion) is:

• 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 significant development pipeline and funds under management.

LREIT is seen to have the potential to evolve into a Singapore-centric commercial play, supported by its sponsor’s substantial local development pipeline.

Statistics (as of May 9, 2025)

• Share Price: SGD 0.51
• 12m Price Target: SGD 0.50 (-1%)
• Previous Price Target: SGD 0.50
• Rating: HOLD
• 52w high/low (SGD): 0.63/0.46
• 3m avg turnover (USDm): 2.0
• Free float (%): 70.1
• Issued shares (m): 2,423
• Market capitalisation: SGD1.2B / USD942M

Major Shareholders:

• Lendlease Group: 28.6%
• The Vanguard Group, Inc.: 2.8%
• Hotel Properties Ltd.: 1.2%

Price Performance:

Relative to the Straits Times Index, LREIT’s share price performance has been:

• -1M: Absolute (%) 6, Relative to index (%) (5)
• -3M: Absolute (%) (5), Relative to index (%) (5)
• -12M: Absolute (%) (8), Relative to index (%) (22)

Key historical share price drivers include:

1. March 2020: Covid-19 outbreak impact, tenant support measures, Milan office tenant BCP activation.
2. June 2020: LREIT wins tender to redevelop Grange Road Car Park.
3. Aug 2021: Completion of acquisition of 53% stake in Jem.
4. Feb, Mar 2022: Announcement to acquire remaining stake in Jem; placement and preferred securities issuance in March.
5. June 2023: Acquires 10% stake in Parkway Parade.

Financial Highlights (SGD m, FYE Jun)

Net Property Income and DPU Trend

The trend shows Net Property Income (NPI) generally increasing over recent years, while DPU saw a decline from FY22 to FY24, forecast to stabilize or slightly recover thereafter. The forecast DPU for FY25/26 is 3.4c, compared to FY22 DPU of 4.70c. This drag is primarily attributed to higher borrowing costs. Forecast debt cost excluding amortization cost is expected to increase from 2.51% in 3Q FY23 to 3.5% in FY24. Passing rents for Jem retail and 313@somerset malls are expected to rise by 4-7% in FY24-FY25. LREIT has SGD400 million of perpetual securities with the first call date in April 2025.

Key Metrics (FYE 30 Jun)

Key Ratios (FYE 30 Jun)

Value Proposition and Swing Factors

LREIT’s principal strategy is to invest in a diversified portfolio of stabilized income-producing retail and office real estate globally. Key aspects of its value proposition include:

• A portfolio spanning Singapore and Italy.
• Support from a strong international sponsor, Lendlease Group, offering a significant local development pipeline.
• Potential to become a Singapore-centric commercial REIT.
• Strong ESG leadership, being the first SREIT to achieve net-zero carbon emissions (Scope 1&2) in 2022 and attaining the highest tier five-star GRESB rating.
• Trading at a discount to book value and offering a competitive yield (noted as 6% yield in one section, and 6.5% FY25E yield in another).

Potential upside swing factors that could positively impact LREIT’s performance include:

• A strong economic and tourism rebound leading to robust rent growth for Jem retail and 313@somerset malls.
• Successful capital recycling initiatives and a shift towards a Singapore pure-play positioning.
• Benign macroeconomic conditions that ease the refinancing of perpetual securities and reduce the overall cost of debt.

Potential downside swing factors include:

• Elevated gearing levels and rising cost of funding.
• Elevated cost of funding complicating the redemption of perpetual securities.
• Major tenants giving up space or not renewing leases in the office assets in Italy and Singapore.

ESG Profile

LREIT is noted for its strong ESG performance and alignment with its sponsor’s commitments. It has a Risk Rating & Score of 14.2 (low risk) and a Score Momentum of -1.7 (improving risk score), as of July 17, 2023, with no reported controversies.

The REIT’s investing strategy focuses on stabilized income-producing retail and/or office assets globally. It is analyzed by ESG investors due to the real estate sector’s emissions contribution and the need for capital access for growth. The board and CEO oversee sustainability performance with support from a dedicated Sustainability Working Committee.

LREIT aims to maintain GRESB leadership, achieve Mission Zero targets, and create social value, aligning with the sponsor’s commitment as a signatory to the United Nations Global Compact and Principles of Responsible Investment. It was ranked first in GRESB rankings in 2022 and was the first S-REIT to attain Net Zero Carbon (Scope 1&2) ahead of target.

Material Environmental Issues:

• Resource efficiency, climate change mitigation, adaptation, resilience building, and targeting GHG emissions.
• Maintained BCA Green Mark Platinum status.
• Committed to Mission Zero: net zero carbon by 2025 (Scope 1&2) and absolute zero carbon by 2040 (Scope 1, 2 & 3).
• Secured SGD960m sustainability-linked loans and SGD335m sustainability-linked derivatives in FY22, expected to generate net interest savings.
• Exceeded environmental targets for energy, water, emissions intensity, and waste reduction.
• 313@somerset is the first mall in Singapore with green leases integrated into 100% of agreements.

Key Governance Metrics and Issues:

• Key material issues: anti-corruption, regulatory compliance, and customer privacy.
• Externally managed REIT, with the manager a wholly owned subsidiary of Lendlease Group, providing support for growth and capital access.
• High board independence and diversity: 5 members, 3 independent. None hold executive functions. 2 women on the board. Independent members chair the Audit and Risk, and Nomination and Remuneration Committees.
• Management fee structure: 0.3% of deposited property value (base fee) and 5% of net property income (performance fee). Acquisition fee 1% and disposal fee 0.5% of deal value. Property management fee for Singapore assets 1.85%-2% of gross rental income and gross operating profit.
• Remuneration paid to senior management in FY22 was SGD1.2m, less than 2% of distributable income.
• Manager has grown AUM significantly since IPO through acquisitions (Jem, Parkway Parade).
• Member of various indices (GPR 250, GPR APREA Investable REIT 100, MSCI Singapore Small Cap, FTSE NAREIT Global Developed) and ranked among Top 10 on Singapore Governance and Transparency Index 2022.

Material Social Issues:

• Health and safety (customer and occupational), employment-related training, diversity and equal opportunity, and local communities.
• No work-related injuries or ill health incidents in FY22. Property manager is bizSAFE partner certified and attained a Silver Workplace Safety and Health award in 2022.
• Close to 90% of the manager’s workforce positively rated the learning & development program, 26 percentage points above the Singapore norm.
• 40% of the board is female, 60% independent. 55% of employees are female (FY22).
• 83% of the manager’s employees volunteered in at least two community service projects in FY22.

Research Coverage and Contacts

This report was prepared by Maybank Research Pte Ltd. Key research contacts at Maybank Investment Banking Group (MIBG) include:

• Krishna Guha (Singapore, REITs, Industrials)
• Anand Pathmakanthan (Head of Regional Equity Research, ASEAN Strategy)
• Wong Chew Hann, CA (Head of ASEAN Equity Research, Malaysia Co-Head of Research, Equity Strategy)
• Thilan Wickramasinghe (Singapore Head of Research, Strategy, Consumer, Banking & Finance – Regional)
• Jigar Shah (Head of Sustainability Research)

Other research teams cover Economics, FX, Fixed Income, Portfolio Strategy, and specific sectors across Malaysia, Singapore, Philippines, Vietnam, Indonesia, and Thailand.