Following Lendlease Global Commercial REIT’s (LREIT) FY2024 ended June results, analysts at CGS International (CGSI) and Citi Research have kept their respective “add” and “neutral” calls at lowered target prices of 74 cents and 58 cents from 83 cents and 61 cents previously.
CGSI analysts Natalie Ong and Lock Mun Yee note that the REIT’s FY2024 distribution per unit (DPU) was a miss, coming in at 3.87 cents which was 17.7% lower y-o-y.
They note that this was mainly due to higher-than-forecast interest expense, forming 91.3% of theirs and 94% of consensus’ forecasts.
In the FY2024, revenue and net profit income (NPI) rose 7.8% y-o-y and and 7.4% y-o-y respectively, due to the upfront recognition of supplementary rent received from the lease restructuring of Sky Complex.
Excluding this, revenue and NPI grew 3.2% y-o-y and 1.3% y-o-y respectively.
Meanwhile, reversions from the period came in at 14.0%, due to reversions at LREIT’s 313 asset.
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“Buildings 1 and 2 of Sky Complex will see a 1.2% rental uplift effective April due to the annual rent indexation. This is on top of the 1.5% rental increase secured for Buildings 1 and 2 when tenant Sky Italia’s lease was restructured in December 2023,” write Ong and Lock.
Portfolio committed occupancy has also increased q-o-q from 88.7% in the 9MFY2024 to 89.1% as at FY2024 due to higher committed occupancy in LREIT's retail portfolio, offsetting the marginally lower occupancy at Sky Complex
The analysts add: “We estimate that around 2.4% of Building 3’s net lettable area (NLA) had been committed as at end-June. Management shared that committed rents are around 50% above previous rents and that it is in discussions with two other prospective tenants for some space at Building 3.”
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In the period, LREIT’s portfolio valuation grew 0.9% or $32.5 million y-o-y, with Singapore properties $79.1 million higher or 2.5% up y-o-y on higher NPI, offsetting the $46.7 million or 10.9% valuation decline at the REIT’s Sky Complex asset.
On this, Ong and Lock write: “Valuation decline at Sky Complex was largely due to a change of independent valuer and a 25 basis points (bps) cap rate expansion as well as a largely vacant Building 3.”
Gearing was largely stable q-o-q at 40.9% while the adjusted interest coverage ratio (ICR) slipped slightly q-o-q to 1.7 times from 1.8 times in March.
Meanwhile, LREIT’s cost of debt increased from 3.50% in 9MFY2024 to 3.58% in FY2024.
Assuming interest rates stay at current levels, the FY2025 cost of debt could increase by 20 bps to 30 bps to between 3.8 % and 3.9% due to the full-year impact of the EUR loans refinanced in October 23 on higher rates.
“Based on a cost of debt of 3.9%, we estimate FY2025 adjusted ICR could land at around 1.5 times. In terms of its divestment strategy, management shared that it received enquiries for Jem office and provided viewings for several prospective buyers.”
Overall, Ong and Lock have rolled forward their estimates to FY2025 to FY2029 DPS, as well as cutting their FY2025 and FY2026 DPU by 12.1% and 13.2% respectively.
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Potential re-rating catalysts noted by the pair include stronger rental reversions, faster backfilling of Building 3, the divestment of Jem and improvements in the REIT’s financial metrics.
Conversely, downside risks include weak reversions or leasing and a slowdown in consumer spending, which could lead to lower turnover rent and weaker tenant sentiment, hurting positive reversions.
Meanwhile, Citi’s Brandon Lee notes that LREIT has brought around 10 or more interested parties to view its Jem office component asset, which is valued at $450 million to $480 million as at FY2024.
He adds that overall occupancy at the REIT’s Sky Complex fell 0.9 percentage points (ppts) q-o-q to 73.9%, due to the withdrawal of a committed tenant.
Despite this, a tenant from the steel industry could replace this vacancy by the next quarter, taking up one to two floors while another tenant from the academic industry is also close to discussion for one to two floors.
“Double-digit occupancy for Building 3 can be achieved if these two tenants commit, though LREIT also has a list of potential prospects, which if all commit can bring occupancy to 100%,” writes Lee.
He continues: “Achieved rents can be 50% higher, which we are not surprised by given passing rent of around EUR200 to EUR210 per sq m/year compared to spot rents of EUR280 to EUR300 sq m. Leasing activity in Italy is slow in general now due to the summer holiday period.”
"We cut FY2025/FY2026 DPU by 13.5/5.5% to 3.94/4.14 cents to reflect higher debt expenses, restructured lease at Sky Complex, lower NPI margins and revised forex assumptions; FY2027 DPU of 4.31 cents is introduced," concludes Lee.
Key upside risks noted by the Citi analyst asset enhancement initiatives (AEI), and net asset value (NAV) accretion from new acquisitions, while downside risks include a sharper-than-expected spike in interest rates would lead to higher financing costs and cap rates, as well as a risk of overpaying for future acquisitions.
As at 1.16 pm, units in LREIT are 1.5 cents lower or 2.73% down at 53.5 cents.
