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LREIT manager responds to questions from unitholders and SIAS including plans for growth strategy

Felicia Tan
Felicia Tan10/20/2022 10:46 PM GMT+08  • 7 min read
LREIT manager responds to questions from unitholders and SIAS including plans for growth strategy
Jem in Jurong, which has six levels of retail space and 12 levels of office space, was fully acquired in April 2022. Photo: Lendlease Global Commercial REIT
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The manager of Lendlease Global Commercial REIT (LREIT) has issued a statement on Oct 20 with its responses to questions from unitholders and the Securities Investors Association (Singapore) or SIAS.

The questions were submitted before the REIT’s annual general meeting (AGM), which will be held at 2pm on Oct 25.

The questions covered a range of topics from the REIT’s performance following the acquisition of the full direct ownership of Jem to its growth strategy.

Jem’s performance

In its statement, the REIT manager said that Jem’s retail portfolio occupancy continues to remain strong at 99.6%. This was in response to questions on the performance of Jem since the REIT’s acquisition of the mall.

The manager adds that LREIT’s portfolio was also strengthened with an increased exposure in the suburban retail segment and the high concentration in essential services trades of 57% by gross rental income (GRI).

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As at end-FY2022 ended June 30, the REIT manager clarified that government and supermarket sectors accounted for 16.3% of its portfolio GRI.

“In regard to asset enhancement initiative (AEI) opportunities in Jem, we are continuously looking to convert under-utilised spaces into leasable units. Flash Coffee at level one and the conversion of the B1 seating area into two leasable units are very good examples on how additional revenues could be generated for unitholders,” says the REIT manager via its statement.

“We are currently exploring AEI opportunities to generate more revenue,” it adds.

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Lower NAV due to enlarged total unit base

In response to a question on how the REIT “had succeed[ed] in generating sustainable value” when its net asset value (NAV) had fallen to 78 cents from 81 cents, the REIT manager clarified that that was due to the enlarged total unit base.

The enlarged base stemmed from the issuance of 551.7 million new units through a preferential offering in March and 162.9 million new units as consideration units to a subsidiary of the REIT’s sponsor in April. Both the preferential offering and consideration units were done to finance the acquisition of Jem.

That said, the REIT manager noted that in the longer term, it believes that its strategy in “proactive asset management and prudent capital management” will “result in improved portfolio of assets and distribution per unit (DPU) growth prospects that will benefit all unitholders”.

Acquisition plans

On its acquisition plans, especially upcoming acquisitions to grow the REIT, the REIT manager noted that the interest rate movement was a concern, adding that it was monitoring the situation “very closely”.

“Our key focus is really to maintain a prudent capital management and hedging strategies to navigate the current market volatility,” it says in response.

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In terms of the pace of acquisitions, the REIT manager noted that it depends “very much on timing, market conditions and quality of the potential asset”.

“Our principal investment strategy to invest in stabilised income-producing real estate assets located globally is unchanged. Each potential asset that LREIT may look at acquiring has to meet the following criteria and be assessed stringently to ensure that it brings value to LREIT’s unitholders,” it adds.

Some of the criteria include the property having a minimum occupancy of at least 80%, the property achieving an average rental rate that is comparable to the market rental rate for similar assets, as well as the property requiring no “material AEIs” within two years of the acquisition.

Debt maturity profile

Answering questions about the REIT’s interest coverage ratio and the REIT’s debt maturity profile, which “looks worrisome” for the FY2024 and FY2025, the REIT manager noted the REIT’s “healthy liquidity position” and high interest coverage ratio of 9.2x as at June 30. The ratio is also at 4.2x in accordance with the Property Funds Appendix of the Code on Collective Investment Schemes, the REIT manager points out.

As at June 30, the REIT’s gearing ratio stood at 40% with fully unsecured debt, ensuring flexibility in the REIT’s balance sheet.

On its debt maturity in FY2024, which mainly relates to a EUR285 million ($397.6 million) Euro term loan facility established during its initial public offering (IPO), the REIT manager has begun early discussions with banks and investors on possible refinancing options. The term loan facility was made to finance the acquisition of Sky Complex.

Further to its statement, the REIT manager said that it will “endeavour” to employ a “prudent” capital structure that comprises an “appropriate” mix of debt and equity for financing its acquisitions.

It adds that it treats perpetual securities as equity instead of debt, seeing perpetual securities as an “efficient form of hybrid equity and priced between LREIT’s cost of debt and its cost of equity at the time it was transacted”.

In addition, when the REIT employed the use of perpetual securities to finance the additional stake of up to 31.8% in Jem in June 2021, perpetual securities were seen as an “attractive funding option” without an immediate need for equity fund raising.

The REIT manager also cited its use of a mix of a private placement, preferential offering and perpetual securities. The combination, which was due to the amount of gross proceeds required, timing and the speed of execution within the narrow window of opportunity, was used to finance the acquisition of the remaining interest in Jem in March and April.

“We would like to highlight that the evaluation of which method to use for raising funds… is dependent on various factors including macroeconomic conditions,” says the REIT manager.

Impact of interest rate on earnings and DPUs

“[LREIT’s] DPU is expected to move by approximately -0.6% per annum for every 10-basis point rise in interest rates, on a pro forma basis,” the REIT manager notes.

It adds that its near-term focus “remains on active capital management to manage cost and gearing ratio.”

“On interest rates, we have been watching the market closely and may take the opportunity to hedge when there is opportunity.”

On KPMG’s high non-audit fees

According to the REIT manager, the significant non-audit fees of $900,500, as pointed out in one of the questions, includes fees mainly due to the acquisition of Jem.

“KPMG has disclosed this fact to the audit and risk committee (ARC) and discussed the safeguards applied to reduce the threat to an acceptable level. The nature of the work is services related to a proposed acquisition and assurance services. The above-mentioned services are not prohibited services,” says the REIT manager.

Sky Complex will continue to deliver ‘steady returns’

In response to one of the questions asking if the REIT manager had plans to increase the GRI from Sky Italia, considering that it takes up 45.4% of LREIT’s net lettable area (NLA) and only contributing to 14.2% of GRI, paling in comparison to LREIT’s second highest tenant, the Ministry of National Development (MND), the REIT noted that Sky Complex has a first mover advantage and signed a long lease of 12 +12 years since 2008.

While its rental is currently under market rate, the complex has an annual rental escalation based on 75% of the Italian National Institute of Statistics’ (ISTAT) consumer price index (CPI) variation.

The rental will only remain “at floor” should CPI turn negative.

That said, the asset comes with a long-term lease till 2023 with a clause break option in 2026, ensuring steady.

Units in LREIT closed 0.5 cent lower or 0.73% down at 68.5 cents on Oct 20.

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