Lendlease Global Commercial REIT (LREIT SP) - Growing Through a Sustainable Global Lens

• A recent Smartkarma webinar (Smartkarma Corporate Webinar | Lendlease Global: Sustainable Returns Through High-Quality Assets) revealed a global commercial REIT with high-quality retail and office properties in Singapore and Italy.

• LREIT saw rental reversions of +16.3% YoY in its 1Q2024 with a portfolio committed occupancy of 99.9% and a weighted average lease expiry of 8.0 years by NLA.

• Management remains optimistic about the coming year with a strong capital position, a high level of sustainably linked finance, a low cost of debt, and an eye on potential acquisitions. This Insight is part of the Smartkarma Corporate Webinars series, supported by SGX through the Investor Education Fund.

Singapore's Commercial Property Market Continues to Recover

The overall Singapore commercial retail market has made a strong postpandemic recovery, driven by domestic demand and a recovery in tourism, with 12.4m tourist arrivals by the end of November and is expected to reach 13m by year-end but still well below the 2019 peak of 19m. New occupier demand has come from new-to-market brands and existing brands building more physical stores. Areas of strong demand include F&B, Athleisure apparel, and luxury retail. There was a tight supply situation in 3Q2023 with vacancy rates continuing to fall with the closure of JCube with the rejuvenation of projects and tourism driving occupier demand along with more workforce footfall, with more conferences, and exhibitions.

A Positive Outlook With More Visitors, Events, and Conferences

There is a positive outlook for rentals and capital values for commercial retail driven by domestic demand and tourism from both leisure and business travellers. 2024 is set to be a stronger year with numerous conferences and events including the Singapore Trade Fair, the Singapore AirShow and the International Dentist Convention, which will bring 80,000 visitors alone. Taylor Swift, Ed Sheeran, and Coldplay will also play in Singapore in 2024. The outlook for retail looks stable in Singapore

Office Market Resilient at the Quality End

The Singapore office market has been relatively resilient despite a rising rate environment and geopolitical tensions, with support from limited supply. There is an ongoing demand for high-quality office stock with a flight to quality buildings with a sustainable spec and a high-quality work environment. 2023 has seen very little new supply in the Investment Grade Office Market with only Guoco Midtown opening this year, helping to support rents. 2024 will see new completions hitting a 7-year high with three major projects coming online including IOI Central Boulevard (1.3 m sq ft), Keppel South Central (600,000 sq ft) and Shaw Tower (400,000 sq ft) with 1.5 m sq ft still left uncommitted. 2Q2023 saw CBD Investment grade rents fall for the first time in 10 quarters and capital values also down. Singapore commercial office rentals and capital values look set to continue upwards

New Office Supply Is Limited

New supply in 2023 could see downward pressure on office rents in 2023 but high-quality buildings should remain resilient. Overall rental reversions should remain positive given the 3-year reversion cycle, with this year's reversions from rents set in 2021. The Singapore government remains supportive of the office sector with no new supply of land until 2030. New supply will come from redevelopments which are required to have a 40% residential component, making it less attractive for landlords to take this route.

Incoming Visitors Will Provide Additional Support

The hotel market in Singapore is going through a steep recovery with RevPAR increasing by +64% YoY in 3Q2023 to S$381. Tourism arrivals at over 12m at 70% of pre-pandemic levels, are estimated to reach 12-14m in 2024. Demand coming from regional visitors from India, Indonesia, and China started. New hotel room supply amounted to 3,274 rooms for 9M2023 from refurbishment and delayed projects coming online.

New Supply Should be Easily Absorbed

Four major new hotels including the Peninsula Excelsior Singapore, A Wyndham Hotel, COMO Metropolitan Singapore, ALoft Singapore Novena, will mean 5,500 new rooms to come from 4Q2023 to 2025, with more than 50% of this in the luxury segment. The hotel occupancy rates at 76.1% in 3Q2023 versus 77.4% pre-pandemic but RevPar is +23% above pre-pandemic driven by the average daily rate of S$501, which is +25% above 2019.A full recovery is expected in 2024 but also potentially more competition with new supply although the increase in visitor arrivals should easily absorb the new supply. New room supply should easily be absorbed by increasing visitor arrivals, which in turn should help to support the commercial retail market.

High-quality Retail and Office Player With a Core Singapore Focus

Lendlease Global Commercial REIT (LREIT SP) is a global commercial REIT with high-quality retail and office properties in Singapore and Italy with high occupancy rates and solid rental reversions. The geographical split, 88% of its assets by value are in Singapore and 12% in Milan. 60% of the portfolio consists of suburban retail/office, 28% prime retail, and 12% in grade A office.

Lendlease Global Commercial REIT Has a Portfolio of High-quality Assets in Singapore and Milan

Jem Is a Go-to Suburban Mall

The company's core Singapore retail assets include Jem, which is one of the largest suburban malls in the West of Singapore with 893,0544 sq ft of lettable area and which is currently 100% occupied with a valuation of S$2,188.0m. Jem has a WALE of 9.1 years by net lettable area (NLA) and 5.8 years by gross rental income. (GRI). It has a tenant reversion rate of 78.2% for the overall portfolio, which allows for some modification of its tenant mix in retail to maintain the attractiveness and relevance of its retail properties.

Jem Is One of the Largest Suburban Malls in Western Singapore

313@Somerset at the Cutting Edge of Retail

Lendlease Global Commercial REIT (LREIT SP) also owns prime retail mall 313@Somerset, which is a youth-orientated mall located in the Orchard Road shopping belt and is directly connected to Somerset MRT station. 313@somerset consists of an NLA of 288,879 sqft with a valuation of S$1.033bn. The property's WALE stands at 2.5 years by both NLA and GRI. 313@Somerset is positioned at the cutting edge of youth fashion in Orchard Road and was the first greenfield development undertaken by Lendlease in Asia.

313@Somerset Is Positioned at the Cutting Edge of Youth Fashion

Office in Singapore Has the Government as a Tenant

The REIT's office portfolio in Singapore is made up of a Grade A office space leased to the Ministry of National Development until 2044. It has a long WALE of 11.8 years by NLA and 14.3 years by GRI. The property has a rental review every five years. In Milan, the REIT owns three Grade A office buildings which are leased to Sky Italia until 2032.

Italian Asset Has a High-quality Long-term Lease

The income received from the Sky complex is hedged with rolling foreign exchange forwards. The annual rental review is based on 75% of the ISTAT consumer price index. The Sky complex has an NLA of 913,565 sq ft with a valuation of Eu290.5m. The complex is 100% occupied with a WALE of 8.6 years by both NLA and GRI.

A Strategic Stake in Parkway Parade

Other than the above core assets, Lendlease Global Commercial REIT (LREIT SP) has taken a strategic stake in Parkway Parade through a 10.0% stake in Parkway Parade Partnership Pte Ltd, increasing the REIT exposure to Singapore's resilient suburban retail segment. The asset has a direct connection to the upcoming Marine Parade MRT station. There are several asset enhancement initiatives planned in phases. This will help to channel more footfall through the development.

Multi-functional Space at 313@Somerset Will Enhance the Destination

LREIT also plans to develop a multifunctional event space adjacent to 313@Somerset. This will have a combined NLA of 330,000 sqft and will strengthen LREIT's presence in the youth precinct. The construction of the site has commenced then it will take 12- 18 months to complete, to create an innovative lifestyle destination. The space will be developed in collaboration with a US-listed entertainment company.

Well-staggered Lease Expiry

Overall the company has a well-staggered lease expiry with leases expiring in 2024 de-risked at 3.9% of NLA and 7.8% by GRI for 1Q2024. The REIT achieved rental reversions of 16.3% in 1Q2024 driven by healthy leasing activities and an uplift in market sentiment. LREIT has a well-diversified tenant base, with the largest exposure coming from F&B, Broadcasting, Fashion & Accessories, fashion & accessories, government and Health & Beauty. Lendlease Global Commercial REIT has a well-diversified tenant base at its retail properties

No Issues With Occupancy

LREIT has no issues with occupancy given a highly committed occupancy of 99.9% for 1Q2024, with Jem at 100.0%, and 313@Smerset at 98.9%, bringing overall retail to 99.7%. Its office properties are 100.0% occupied by single tenants on long-term leases, with the Singapore office until 2044 and Milan until 2032.

Early Refinancing Leaves the REIT Competitively Funded

Lendlease Global Commercial REIT (LREIT SP) refinanced a Eu285m loan at the end of September, with no refinancing risk on committed debt facilities until 2025. The REIT has undrawn debt facilities of S$118.7m, giving it some flexibility to look at any attractive opportunities. LREIT pursues an active capital management strategy with circa 61% of its borrowings hedged. The company may look to increase hedging further given that rates look close to peaking.

Sustainable credentials in place Sustainably linked financing also accounts for 89% of total committed debt facilities at the end of September 2023, with sustainability targets being met leading to interest savings on those loans. The REIT's gross borrowings amount to S$1,543.6m, which represents a gearing ratio of 40.6%. The average weighted debt maturity stands at 3.1 years, with the average cost of debt at 2.94% and interest cover at a comfortable 3.9x

Strong Sustainability Credentials in Place

From a sustainability perspective, the company has for the first time been awarded a GRESB ranking as Global Sector Leader in Retail. It has also won the Regional Sector Leader in Asia Retail (Overall) and Asia Retail (Listed). LREIT also maintained the highest 5-star GRESB rating and scored "A" in public disclosure. The company continues to work on its sustainability performance reducing energy usage intensity by 18%, reducing water use intensity by 14%, reducing emissions intensity by 18%, and with a waste recycling rate of 20%. It also has a strong diversity bent with 40% of Directors women as well as 60% of senior management, with 55% of the total workforce being women. It has zero work-related injuries and ill-health incidents.

Drive Resilient and Sustainable Returns

The management's key focus is to drive resilient and sustainable returns through proactive asset management to enhance the resilience of its assets. It also continues to pursue active capital management to manage its costs and gearing. It continues to explore renewable energy options and constantly seeks out asset enhancement opportunities, with 313@Somerset being a good example. LREIT remains on the lookout for investment opportunities to expand its high-quality portfolio.

Close Scrutiny of Tenant Costs

The tenant sales for the company's portfolio are around 20% above preCOVID levels, with visitation to its retail assets close to the pre-COVID average. LREIT bases its rental reversions on tenant operating costs, with operating costs now lower than pre-COVID but sales are significantly higher. This has given the REIT the latitude to raise rentals but managment keeps a close eye on striking the right balance so as not to put too much pressure on the tenant's cost base. With this in mind, the company remains positive on the direction of reversions struck in 1Q2024 as a strong indicator for FY2024.

Establishing Identity

Another strategy LREIT employs is to establish a strong identity at its retail malls to draw in shoppers and aid the performance of its tenants. Its focus customer base is the young and young professional shoppers so it needs to make sure the tenants at its malls are both relevant and sustainable over time to help drive sales over time. For this reason, LREIT looks to strike a balance between major and minor tenants. Management will also monitor offline and online sales of its tenants to establish how sustainable those businesses are over time.

Driving Shoppers With a Relevant Tenant Mix

Lendlease Global Commercial REIT aims to drive shoppers to the mall as well as help its tenants drive sales with a relevant tenant mix and highquality facilities. Transport connections and nearby attractions are also important to the success of its malls. Despite having virtually 100% occupancy, LREIT's malls have a retention rate of 78%, which suggests a changing tenant mix over time. The company constantly monitors the performance of its tenants to craft a sustainable trade mix at its properties. 313@Somerset is often the destination mall for new youthful brands to enter Singapore.

313@Somerset Is a Magnet for Youthful Shoppers

The company has an additional 10,200 sq ft plot ratio to be deployed to attract youth shoppers. Once deployed it will add new cashflow but need to maintain the flow through the mall without disruption. This means that it will be deployed in a sensitive way. A new multi-functional space is being developed in collaboration with a US company which will help to develop the space interestingly and draw in more crowds.

Locals Dominate the Customer Base

The portion of locals is around 80% with the remaining 20% from foreigners, especially for 313@Sommerset on Orchard Road but the focus is to attract local shoppers. Lendlease Global Commercial REIT (LREIT SP) continues to collaborate with tenants on promotional activities but the Lendlease Plus app helps to lock in shoppers and roll out promotional campaigns.

Maintain a Quality Tenant Base

In the office segment, LREIT aims to ensure it maintains a high-quality and reliable tenant base. For its two buildings, the Milan Office is Sky Italia which is owned by Comcast Corp, the largest media operator globally. The company pays rent net of costs, with reversions based on CPI plus basis. The Singapore office is occupied by a government institution with a long duration and a rental reversion every 5 years.

Multiple Sources for New Assets

Looking at asset acquisitions, LREIT's emphasis is on the tenant, the location plus the sustainability qualities of any potential acquisition. The REIT's sponsor Lendlease Group (LLC AU) is a potential source of new assets given its AUM but LREIT will also look at third-party acquisitions, with the Milan asset being a good example which was a non-Lendlease asset. LREIT will look mainly at developed market and near-developed market assets to ensure a reliable revenue stream. LREIT's first priority will be to acquire assets in Singapore before looking overseas, given Singapore ready accounts for 88% of its assets.

Parkway Parade Is a Prime Example

Parkway Parade is an example of a potential acquisition, where Lendlease Global Commercial REIT (LREIT SP) already has a 10% strategic stake. If it performs well then it may increase its stake in the asset. The timing on this is unlikely to be immediate and will also be a question of gearing. Parkway Parade is seen as an iconic asset in the East of Singapore, well-known by local residents and soon to be connected by MRT.

A Potential Pipeline in Place

Lendlease Global Commercial REIT revealed during the recent Smartkarma webinar that there was already a good pipeline of potential asset acquisitions in Singapore including three office properties but it will be a question of growing the AUM first. After making acquisitions in Singapore, LREIT will then look at overseas assets. The REIT would also consider selling down existing assets to bring down its gearing.

Perpetual Notes Are Equity But May be Redeemed

There have been several questions about the REIT's Perpetual notes and that these should be considered when looking at the company's gearing but management remains adamant that these should be treated as equity as a point of accounting principle. It may consider redeeming the notes if it becomes beneficial from a funding perspective.

Well-positioned to Weather Any Risks

The key risk that the company sees this year is on interest rates but rates are seen as being close to the peak. LREIT has no refinancing risk until 2025 but feels confident that it will remain lower than the market. The focus will be on driving revenues through the most relevant and sustainable tenant mix in its retail assets as well as focusing on keeping operational costs under control through strategies inclusing bulk purchases of services and outsourcing to reduce its cost base.

Solid Portfolio With a Huge Potential Pipeline

Lendlease Global Commercial REIT (LREIT SP) looks well positioned to grow its asset base relatively rapidly, to reduce gearing to prepare to make acquisitions in Singapore. There are also existing opportunities to increase the lettable area at 313@somerset, with the multi-functional space providing a draw to increase footfall at the mall. With potential catalysts from acquisitions ahead, Lendlease Global Commercial REIT (LREIT SP) looks attractive on current valuations trading on 0.8x PBV, with a dividend yield of 6.4%.