PhillipCapital and CGS International maintain their “buy” and “add” calls on Lendlease Global Commercial REIT JYEU (LREIT), respectively, following its business update for the 1QFY2025 ended September.
PhillipCapital and CGSI have kept their target prices unchanged at 80 cents and 71 cents, respectively.
In its 1QFY2025 results, LREIT did not release any financials.
However, LREIT’s portfolio committed occupancy rose from 89.1% at the end of FY2024 to 89.5% in 1QFY2025, due to higher committed occupancy for Building 3 of Sky Complex in Milan.
CGSI analyst Natalie Ong and Lock Mun Yee estimate that LREIT signed leases for approximately 10,000 sqft of space in 1QFY2025, lifting committed occupancy at Building 3 from approximately 2.4% in end-FY2024 to approximately 6.5% in 1QFY2025.
Management notes that advanced negotiations with several potential tenants could lift committed occupancy of Building 3 to approximately 30% in end-Dec 2024.
According to PhillipCapital analyst Liu Miaomiao, “The building receives strong leasing interest as leasing momentum is on the recovery in Milan with green certified building become tenant’s key selection criteria.”
Overall retail occupancy remained high at 99.1%.
CGSI’s Ong and Lock note that 1QFY2025 rental reversions remained healthy at 11.4%, driven by 313@Somerset which delivered reversions in the teens, while reversions at Jem were in high single-digits.
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On the other hand, 1QFY2025 tenant sales fell 5.7% y-o-y, at 111% of pre-covid levels in 1QFY2020, likely due to the stronger Singapore dollar, which led to more outbound spending.
PhillipCapital’s Liu notes that sales at Jem were also affected by an MRT shutdown for over a week, and sales might have matched last year’s levels if adjusted for this disruption.
“Nonetheless, we believe occupancy cost at 313@Somerset and Jem remained healthy at approximately 23%, compared to 2019 levels of approximately 25%, and approximately 17-18% respectively, which should support positive reversion in FY25F, in our view,” Ong and Lock add.
PhillipCapital’s Liu expects the reversion in 1HFY2025 to be supported by at least 5% reversion from Jem’s rental review in December this year.
“Rental reversion for FY2025 is anticipated to be in the high single digits,” Liu adds.
As at Sept 30, LREIT’s gearing fell 0.2 percentage points (ppts) q-o-q to 40.7%, while its adjusted interest coverage ratio (ICR) fell slightly q-o-q to 1.6 times.
The REIT’s cost of debt increased from 3.58% in end-FY2024 to 3.74% in 1QFY2025, due to full-year impact of refinancing its euro-denominated loans in October 2023.
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Around $360 million or 23% of total borrowings are up for refinancing in April 2025, in addition to $200 million at 5.25% perpetual securities (perps) with an April 2025 call or reset date.
LREIT is engaging with prospects on the divestment of an office property in Jem, valued at approximately $450 million to $480 million and is largely favoured by institutional investors given its long weighted average lease expiry (WALE) and stable income.
If LREIT divests its Jem office, CGSI’s Ong and Lock note that the divestment proceeds could be used to partially pay down the perps/loans maturing in April 2025, reducing the REIT’s overall cost of capital and improving its adjusted ICR.
CGSI’s Ong and Lock state that during the 1QFY2025 analyst call on Nov 12, management noted that it is still in negotiations with a few prospective buyers.
As such, CGSI’s Ong and Lock are of the opinion that the divestment is likely to take place in 2025 and LREIT would likely reset its 5.25% perps on the April 2025 call date.
PhillipCapital’s Liu notes that assuming a sale price of $450 million, she anticipates gearing to decrease by 8.1%.
Management expects the cost of borrowing to be stable at current levels for FY2026/FY2025F.
“We think LREIT has multiple strategies in place to improve its operating/balance sheet metrics,” CGSI’s Ong and Lock note, adding that they expect “high occupancy to support the positive rental reversion trend at 313@Somerset and Jem”.
As at 4.26pm, units in LREIT are trading at 57 cents flat.
