Hello, savvy investors! Welcome back to ‘The Dividend Uncle’. Today, we’re diving into Lendlease Global Commercial REIT (or LREIT), which has generated significant interest and concern among us. Just last month, LREIT’s parent company, Australian property developer Lendlease Group, announced a major strategy shift to reduce its overseas exposures. This move, aiming to channel AUD 4.5 billion back to Australia, comes as Lendlease faces financial challenges and high debt levels, sending their share price into a tailspin.

In this post, we’ll explore what this means for LREIT and what are the potential paths forward for LREIT. We will then discuss whether you should invest in LREIT given that the prominent sponsor has waned.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Positive Operational Performance Offset by Debt Concerns

Lendlease Global Commercial REIT announced a credible set of financial performance for Q1 2024, especially the operational performance of its properties.

LREIT’s retail properties, particularly 313 @Somerset and Jem, demonstrated robust rental reversion rates of 15.3%, with 313 achieving around 20% and Jem about 10%. This strong performance in retail rental reversions indicates resilient demand for LREIT’s retail spaces. Although office rental reversions were modest at 1.5%, long-term leases contributed to about 22% of the total gross rental income, providing stable support. Additionally, LREIT is expected to see further rental upside from Building 3 at Sky Complex, driven by healthy office demand in the surrounding area and lower-than-average rental rates previously signed by Sky Italia.

On the redevelopment front, the Grange Road carpark project has experienced some delays, with its introduction now expected by 2H2025. This redevelopment is anticipated to boost footfall and gross turnover rent at 313@Somerset.

However, these gains are tempered by the challenges posed by LREIT’s elevated gearing, which increased to 41%. Including perpetual securities issued, the REIT’s gearing could be as high as 51.5%. Additionally, the rising funding costs, which saw a jump from 3.37% to 3.5%, further strain the REIT’s financials. In the current climate of high interest rate, with only 61% of its debt fixed, higher financing expenses may continue to affect LREIT for some time.

This balance of strong operational performance against a backdrop of increasing debt and funding challenges presents a mixed outlook for LREIT, requiring careful monitoring by investors.

4 Possible Paths For LREIT’s Future

Looking beyond its financial results for now, Lendlease Global Commercial REIT finds itself at a critical juncture following a strategic shift by its parent company, Lendlease Group. The announcement to exit all international projects and assets has raised questions about the future of LREIT. It’s essential to explore the potential paths LREIT might take moving forward. Let’s delve into four possible scenarios that could shape the REIT’s future and impact investors.

1. Change in Sponsor: Potential Shift Ahead

Lendlease Group’s recent announcement of a significant strategy shift, aiming to reduce its international exposures, has raised the possibility of a change in sponsor for LREIT.

Over the past month, we’ve seen other sponsors sell their stakes in Singapore-listed REITs to manage their financial positions. For instance, Cromwell sold Cromwell European REIT to Stoneweg Group, a pan-European and US asset management platform with €4 billion in assets under management. Similarly, ARA and ESR sold ARA US Hospitality Trust to Tang Group, which has experience with listed entities such as SingHaiyi Group and Chip Eng Seng.

Lendlease Group is on a somewhat similar path due to its financial challenges and high debt levels. This potential change could see LREIT acquiring a new sponsor.

In my view, the trajectory of such a move could be slightly negative due to the uncertainties surrounding the new sponsor’s ability to enhance the REIT’s performance. As we have seen from the other 2 REITs, the new sponsors then to be small-ish companies, which found the opportunity to own a listed REIT attractive. While new sponsors may bring fresh strategies, their limited prominence compared to established entities could pose risks and affect investor confidence.

Hence, investors will need to scrutinize the new sponsor carefully, considering their track record and capability to manage and grow the REIT effectively if it should materialise, adding to the uncertainties.

2. Merger of REITs: A Strategic Path Forward

Given Lendlease Global Commercial REIT’s current high gearing ratio of 41%, a merger with other REITs could be a strategic move to achieve better economies of scale and enhance its financial stability. Potential merger candidates include Starhill Global REIT and Paragon REIT, both of which own prominent shopping malls along Orchard Road, Singapore’s premier shopping belt.

Starhill Global REIT owns Wisma Atria and Ngee Ann City, both iconic shopping destinations with high foot traffic and a diverse tenant mix. Paragon REIT, as the name implies, owns Paragon Mall, another major retail landmark on Orchard Road. These assets are well-regarded and have maintained robust performance over the years.

Importantly, both Starhill Global REIT and Paragon REIT are relatively small and have lower gearing ratios of around 37%, compared to LREIT’s 41%. A merger with either of these REITs could help lower the overall gearing of the combined entity, improving financial stability and potentially leading to a re-rating by investors. The enhanced scale and diversification of properties could also provide more robust revenue streams and operational efficiencies.

However, mergers are complex and require alignment between the management and owners of both REITs. Despite these challenges, such a merger represents the best potential outcome for LREIT, as it could significantly strengthen its financial position and market appeal.

3. Potential Acquisition by Larger Cap REIT

Another potential path for LREIT could be acquisition by a larger cap REIT. This move would allow Lendlease Group to raise capital and refocus on its core business in Australia. For LREIT investors, being part of a larger REIT could provide better diversification and access to higher quality assets.

However, this scenario seems rather unlikely. Frasers Centrepoint Trust, for example, might not be interested in such an acquisition because their portfolio strategy focuses on suburban malls, which are favored by their investors. Adding prime retail malls might not align with their current investment thesis. On the other hand, CapitaLand Integrated Commercial Trust could be a potential suitor. But given their current gearing ratio of 40%, launching an acquisition for LREIT could deteriorate their debt profile unless the acquisition terms are highly attractive to existing LREIT investors.

4. Chugging Along

Lastly, LREIT might continue on its current path, focusing on operational improvements and managing its high gearing and tenant departures. While this scenario may not be exciting, it allows LREIT to stabilize and gradually improve its financial position. Investors would closely watch how the REIT manages these challenges, but the share price might just chug along without significant movement.

The Dividend Uncle’s Take

A REIT’s sponsor has always been a critical factor in its success. A good sponsor provides financial support during tough times, offers a pipeline of acquisition opportunities during prosperous times, and bolsters the REIT’s reputation and trustworthiness at all times. Hence, when assessing a REIT, the evaluation of its sponsor is essential.

In the case of LREIT, Lendlease Group has been a strong sponsor, offering credible assets and support. However, the property development landscape is becoming increasingly challenging. Margins are narrowing, and profitability is harder to achieve. While Lendlease’s decision to refocus on its core business in Australia is understandable, it introduces uncertainty for LREIT investors.

As we discussed earlier, a merger with another REIT, such as Starhill Global REIT or Paragon REIT, could potentially provide a more stable and advantageous outcome. On the other hand, a sale to smaller funds or companies with limited expertise introduces significant uncertainty and lacks substantial benefits. The outcome of such a scenario could swing either positively or negatively, and it’s impossible to predict with certainty.

Personally, I have held LREIT due to the quality of its Singapore properties and its reputable sponsor. However, with Lendlease stepping back, my confidence has waned. I am not inclined to buy more of LREIT at this time and will be closely monitoring the situation with the sponsor. As always, I will continue to share my insights and views on LREIT with you. Stay tuned for more updates and in-depth analysis.

In conclusion, LREIT faces potentially exciting and volatile times due to its parent company’s strategic shift. Whether it changes sponsors, merges with another REIT, or continues on its current path, there are opportunities and risks to consider. As always, stay informed, stay invested, and keep an eye on the long-term fundamentals. If you found this post helpful, don’t forget to like, and keep a lookout for the latest posts on this website, or subscribe to my YouTube channel, and leave a comment. Until next time, happy investing!