Quick Notes on LendLease Global REIT

I like their current malls, and they have a high yield.  Lets look further.

All numbers are from their unaudited pro-forma 2021 results (for the JEM acquisition - starts p235).

This idea was from Dividend Titan.

Properties

Three properties.  By AUM:

• 47%: JEM Retail: Heartland mall in Jurong, it shares Jurong east MRT with 1 or 2 other malls.  Leasehold: expiring 2109.
• 29%: 313@Sommerset: Mall above Sommerset MRT in the city.  Leasehold: expiring 2105.
  
• 13%: JEM Office: 12 levels of Grade-A office space.  Leased to Singapore Ministry of National Development until 2045, with a rent review every 5 years.
• 12%: Sky Complex: Three A-grade office buildings in Italy, leased to Sky Italia (Italian broadcast & pay TV) until 2032 (option to break in 2026), and indexed (three-quarters) to Italian inflation.  Freehold.

I think their malls are quite good.  JEM is at the bustling Jurong East MRT and is usually busy.  Compared to its the neighbouring malls: Westgate is slightly more upmarket, and JCube is too small and far away to have critical mass.  I also like 313@Sommerset: its usually quite busy on weekends, due to MRT traffic, even when neighbouring malls a few blocks away were empty (pre-covid).  Both malls have a good vibe.

I don't like offices, but am comfortable with JEM Office's long lease with 23 years remaining.  Don't know if its indexed to inflation.

I don't like Italy.  Or offices in Italy.  Need to see if Sky Italia takes the option to break the lease in 2026. TV is a dying industry, and Sky Italia should finish its downsizing plan in 2025, meaning less office space.  OTOH, upside in this property may be limited: Under Italian law, upon lease expiry, the landlord must re-offer the lease to the same tenant (under existing terms?), before they offer it to other parties who may be willing to pay more (p143).

Debt

Gearing is 41%.  MAS limit is 50%.

They have 200m of perpetual securities (paying 4.2% pa).  Adding this to debt brings up the gearing to 44 or 45%.  I don't like companies that issue perps, but like bonds, they benefit the issuer in times of high inflation.

A quarter of their debt is denominated in Euros, whereas only 12% of their assets are in Europe.  Thats a bit of a currency risk. The Euro denominated debt is until 2024.

Overall: their debt is pretty high.  I think the next acquisition must be funded entirely by equity.

Incentives

Base management fees are a flat 0.3% of the asset's value.  Incentive fee is 5% of NPI (p326).  Pretty standard for Singapore REITS, though I prefer to see incentives based on a per-unit measurement.  Incentives based on NPI can make them grow for the sake of growth.

Lendlease, the sponsor, holds 26% of the REIT, reducing the chances of them dumping bad properties into it.  I also think that, because they have soooo many properties to dispose of, they would be better off building up this REIT as a reputable longterm investment, rather than just dumping some lousy properties into it in the first few years.

They've only done one acquisition since they listed - the big JEM one.  It should be ~10% DPU accretive, increasing DPU to 5c.  Lets see how that goes.

Future Growth

If they want to grow in Singapore, the sponsor has 2 properties:

• Parkway Parade: a mixed office/retail mall.  A very old mall from the 80's.  Not near an MRT, though its in a place where residents have cars.
• Paya Lebar Quarter.  Large mixed use development, directly accessible from Paya Lebar MRT.  I haven't seen it.  Sounds busy, but there are competing malls next door.

Lendlease also has a lot of mixed use properties the world.  I'm sure they will be passed down to the REIT.  Ten years from now, the REIT will look very different...which is why they have the word 'Global' in their name.  I'm cautious on that, as I have no way to know the prospects of these overseas properties, and I don't like offices in general.  We have to trust REIT management to take care of shareholders, and their track record is not long enough now.  I probably would limit myself to  5% position.

Conclusion

I bought a 5% position at 76.5c this morning, as their share price dropped due to news of the preferential offering.  

Just realised that the Preferential Offering takes place 30th March, if I subscribe to it (@ 72c per share), I'll have a 6.5% position.  We'll see....

Update 10th April 2020: They issued less shares than expected, and issued 200m perps.  I calculate their new pro-forma DPU would be 4.8c.