Lendlease Global Commercial REIT: Sturdy capital management bodes well to meet short term financial obligations

Phillip Bond Desk  |   17 Jun 2022  |    16 views

Lendlease Global Commercial Reits (LREIT) is a Singapore real estate investment trust with a primary investment strategy in diversified portfolio of stabilized income-producing real estate assets*. Its portfolio currently comprises 313@Somerset in Singapore (99 year leasehold from 2006), Jem in Singapore which was fully acquired on 22 April 2022 (99 year leasehold from 2010) and Sky Complex in Milan (freehold).

 

*Stabilized income-producing real estate assets are:

-Assets that have achieved a minimum occupancy of at least 80%

-Assets that have achieved an average rental rate comparable to the market rental rate for similar assets

-Assets which do not require material asset enhancement initiatives within two years of the acquisition

-Assets that are deemed suitable for acquisition by LREIT taking into account market conditions at the same time of the proposed offer.

 

LREIT is sponsored by Lendlease Corporation Limited, a part of the Lendlease group. It is an international property and infrastructure group that is listed on the Australian Securities Exchange and has operations in Australia, Asia, Europe and the Americas. It currently has A$111.8bn in the development pipeline and funds under management of A$42bn. LREIT is also managed by Lendlease Global Commercial Trust Management Pte. Ltd., an indirect wholly-owned subsidiary of Lendlease Corporation.

 

Lendlease Global Commercial REIT Financials in 1H2022

In the 1H of FY2022, net property income declined by 2.5% YoY from $30,393 million in 1H2021 to $29,643 million in 1H2022. This was due to a fall in gross revenue attributable to lower rental reversion at 313@somerset and lower revenue from Sky Complex due to foreign exchange. Despite the decline in net property income, after accounting for distribution adjustment such as unrealized foreign exchange gain, net change in fair value of derivatives, amortization of debt-related transaction costs, management fees paid in units, the amount distributable to Unitholders was S$28.6 million, which translate to an increase of 2.6% YoY in Distribution per unit of 2.4 cents per unit in 1H2022 vs 2.34 cents per unit in 1H2021.

 

Though there were no financial updates in the 3Q of FY2022, its portfolio occupancy rate remained at 99.9% while their weighted average lease expiry (WALE) profile stood at 8.2 years by net lettable area (NLA) and 4.3 years by gross rental income (GRI).

 

Credit Metric

An overview of LREIT’s capital management in the 3Q of FY2022 shows gross borrowings, have decreased by 1.45% from the previous quarter from $666.6 million on 31st Dec 2021 to $656.9 million on 31st March 2022. Its gearing ratio has also improved from 33.5% from 1H2022 to 27.7% in 3Q2022. Interest coverage also remains robust at 10.3 times in 3Q2022, an improvement from 9.7 times from 1H2022. This is in accordance with its loan agreement requirements. In FY2023, $99.3 million of debt obligations will expire but the company currently has a $1bn of undrawn multicurrency debt facilities to meet this obligation if needed. As at 4 Feb 2022, approximately 90% of its borrowings are hedged to fixed rates. The bulk of these borrowings are from its Euro denominated term loan facility for its Euro capital investment in Sky Complex which LREIT has a natural hedge on. This Euro term loan will be maturing in FY2024. Secondly, the group also utilize interest rate derivatives to manage the exposure on their floating interest rate loans thru hedging the interest expense on their floating borrowings to a fixed rate. As at 30 June 2021, the Group have interest rate swap and options with tenors of three to four years with total notional amount of S$198,594,000 and €285,000,000 (equivalent to approximately S$454,395,000). Therefore, LREIT looks to be well positioned to meet its debt obligations. In 1H2022, cash and cash equivalents were at $47.5 million and Cash to ST debt ratio stood at 37.6%. Its net cash generated from operation activities is at $28.3 million while operation cash flow coverage ratio stood at 4.32%.

 

Recent Issue:

Lendlease Global Commercial REIT 5.250% Perpetual (SGD)

  • Issue size: $200,000,000
  • Coupon Payment: Semi – annually (11 April and 11 October with the first payment on 11 October 2022)
  • The issuer has the option to recall the bonds at the end of year 3 and every 3 years thereafter. If the bonds are not redeemed in the 3rd year, they will be reset at prevailing SGD 3yr SORA-OIS plus the initial spread (3.043%)
  • The proceeds from the issuance will be utilized for general working capital and capital expenditure requirements and general corporate purposes of the Group.

 

Outlook

Though borders have reopened, it would take a while before tourism arrival rates reach pre-pandemic levels (294,304 tourist arrivals in April 2022 vs 1,544,248 in April 2018). Retail sales are still largely supported by local spending. Additionally, with the adjustment of more people heading back to their offices and the lifting of restrictions on the group limit for dine in, 313@somerset and Jem in Singapore will experience an improvement in terms of footfall which may result in higher tenant sales. Despite the rising energy costs and inflation, its Sky Complex in Milan is still expecting to generate a stable revenue as it operates on a triple-net lease structure (NNN) with an annual rental escalation based on the consumer price index (CPI). The current Italy CPI is up by 2.77% from 108.3 in Jan 2022 to 111.3 in May 2022.

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