Lendlease Global Commercial REIT - Maybank Research 2024-05-07: Navigating Headwinds ~ Healthy Operating Metrics, Higher Funding Cost

• Lendlease Global Commercial REIT (SGX:JYEU)’s 3QFY24 business updates indicate operations remain steady amid a challenging funding environment.
• Portfolio occupancy inched up as new leases were signed in Sky Complex, Milan. Malls in Singapore maintained near-full occupancy with mid-teens rent reversions. However, gearing and funding cost inched up due to capex drawdown and hedge repricing.
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Resilient operations

• Portfolio occupancy was 88.8%, inching up from 87.9% in 2QFY24. This was on the back 8.1% of the NLA of Building 3 of Sky Complex securing commitments at market rents. Retail portfolio occupancy was 99.4% vs 99.6% in 2QFY24.
• Tenant sales increased 2.6% y-o-y in 3QFY24, reversing from a decline in 2Q. Footfall increased 6.1% y-o-y in 3Q.
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Gearing & funding cost up; pose downside risk to distribution

• Lendlease REIT's gearing rose from 40.5% to 41% as ~S$20m of debt was drawn down for capex in Sky Complex Building 1 and 2. According to management, tenant Sky Italia also contributed to the capex. Funding cost increased from 3.37% to 3.5% q-o-q and the adjusted interest coverage ratio fell to 1.8x from 1.9x.
• We expect Lendlease REIT's gearing and funding cost to rise as capex related to Building 3 is drawn down unless it is funded from the ~S$13m of supplementary rental income received from the restructuring of leases. That in turn will pose downside risk to distribution.
• While management can acquire an incremental stake in Parkway Parade, divestment is more in focus. Enquiries have been fielded for the Jem office component, though management is seeking a more optimal price.
• Interestingly, last week Lendlease REIT set up a S$500m multi-currency Euro commercial paper programme to issue short-term (less than a year) notes.

Maintain BUY

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Krishna Guha Maybank Research | https://www.maybank-ke.com.sg/ 2024-05-07 SGinvestors.io

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