7 Reasons to Buy Lendlease Global Commercial REIT Despite Interest Expense Pressure

August 10, 2023

Lendlease REIT Somerset

For Singapore investors, REITs are a large part of the investing landscape in the city-state.

And for the past year or so, they’ve had a hard time growing their portfolios, given the rising cost of debt.

Earlier this week, Lendlease Global Commercial REIT (SGX: JYEU), also known as LREIT, reported its earnings which saw both its net property income (NPI) and gross revenue double to S$153.9 million and S$204.9 million, respectively.

In spite of that, we saw a decline in its distribution per unit (DPU) by 3.2% to S$0.47 for FY2023.

The decline in DPU was mainly due to higher interest expenses that wiped out the rental growth.

With mixed earnings, here are seven reasons why investors should take advantage of market weakness to buy LREIT.

1. Positive rental growth and robust property income

NPI jumped 103.9% year-over-year (yoy) to S$153.9 million, reflecting strong performance in its portfolio, including contributions from Jem and other key assets.

Such figures demonstrate the REIT’s ability to generate income through strategic acquisitions and organic growth.

2. Strong occupancy rate and retail recovery

The occupancy rate of 99.7% as of June 2023 and retail sales of around 116% of pre-Covid levels in FY2023 indicate a resilient and recovering retail market.

This puts LREIT in a position to capitalise on positive market trends, further solidifying its income stream.

3. Strategic acquisitions and portfolio rejuvenation

LREIT has been focusing on growth through acquisitions, such as the growing stake in Parkway Parade and the positive valuation of its key Singapore properties like Jem and 313@Orchard.

This strategic positioning aligns with market trends and capitalises on opportunities, potentially driving further growth.

4. Singapore-centric play

With plans to revitalise the Orchard Road sub-precinct and other areas, LREIT’s assets are well-placed to benefit from urban development initiatives.

The REIT’s key Singapore malls are poised to gain from resilient domestic consumption and a steady recovery in tourism.

5. Sustainability and ESG credentials

Being the first S-REIT to achieve net-zero emissions and a high ranking in the Global Real Estate Sustainability Benchmark (GRESB) adds to LREIT’s appeal for investors prioritising Environmental, Social, and Governance (ESG) factors.

6. Attractive valuation and dividend yield

Despite the higher interest costs and challenging macro conditions, the 15% discount to book and a 7% yield make LREIT’s valuation appear attractive.

7. Managed risk profile

LREIT’s gearing ratio crept up slightly to 40.6% as of end-June 2023, from 39.3%, due to additional debt drawn to finance the acquisition of a 7.71% stake in Parkway Parade.

In line with the rising interest rate, the average cost of debt for the year has also increased to 2.69% from 1.69% in FY2022.

While there are risks related to higher interest rates, non-renewals of master leases, and other macroeconomic factors, the REIT’s portfolio diversification, strategic planning, and financial management mitigate these risks to some extent.

LREIT’s growth and attractive value appeal to investors

In conclusion, LREIT presents an appealing investment opportunity marked by robust rental growth, strategic acquisitions, strong occupancy rates, resilient retail performance, sustainability credentials, and an attractive valuation.

While the rising interest rate environment has put a dent in LREIT’s growth story in FY2023, its valuation remains attractive.

In fact, we continue to see a strong positive outlook on LREIT’s rental growth trend, and most analysts still have a buy rating for the company, indicating confidence in the investment thesis.

The average 12-month target price for LREIT is 82 Singapore cents, indicating upside of more than 20% from its current level.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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