Clarification from Investor Relation Manager of Lendlease Global Commercial REIT

Lendlease Global Commercial REIT ("LREIT") price collapsed in March 2020 was a real disaster in the face of the COVID-19 crisis. It plummeted swiftly from S$0.90 per unit to a low of S$0.465 per unit which is a plunge of almost 48%. Holding just 2 properties of Somerset 313 in Singapore and Sky Complex in Italy in its IPO portfolio, LREIT has the potential to grow further due to the many properties in the portfolio of its main sponsor, Lendlease Group, which is a leading international property and infrastructure group listed on the Australian Securities Exchange.

In addition, the Singapore Master Plan 2019 has formalised the increase in permissible plot ratio for 313@Somerset from 4.9 to 5.6 resulting in a potential increase of up to 10,846sqft of gross floor area via organic growth route. Based on Commercial Guru, the rental psf for retail is S$20.90. This works up to be potential upside of S$226,681 per mth and S$2.72Mil annually.

Anyway, the focus of this posting is to look at the free cashflow available for distribution as apparently, some retail investors in investment forum are speculating that LREIT has hidden financial problem since it was strangely paying out distribution for the Oct'19 to Dec19 period in excess of its free cashflow.

Insufficient free cashflow to pay distribution
LREIT derives around 66% of its property income from 313@Somerset and 34% from Sky Complex in Milan.

The distribution to unitholders are S$15.01Mil. This is further broken down into distribution from (i) operations (S$10.33 Mil) and (ii) capital returns (S$4.67Mil). The free cashflow can be extracted out from the cashflow statement (see below). Since there are no capital expenditure, the whole cashflow from operations during the Oct'19 to Dec'19 period is only S$10.1Mil. There is thus a gap of approximately <S$5Mil>.

Statement of Distribution

Cashfllow Statement

The huge gap in free cashflow is whereby some retail investors begin to suspect that something is not in order with its operations and that LREIT maybe hiding the fact that it is in financial trouble.

Reply from Investor Relation Manager of LREIT- Just Timing Difference
Recently, I dropped a note to LREIT to clarify and inquire the reason for requiring a capital distribution component to top up the total amount available for unitholders distribution. I was pleasantly surprised that LREIT Investor Relation team replied promptly by the next working day-the prompt response also reflects the dynamic culture in LREIT and reflects well on their whole organisation. Ms Ling Bee Lin, Manager of LREIT Investor Relations, replied that it was due to timing difference between distributions received from Italy and pay out to the Unitholders.

I went on to suggest to LREIT that a more prominent display of footnotes in future should be released during the results announcement on such “timing difference” so as to rest assure investors that there is no going concern issue. Bee Lin reassured that LREIT Investor Relation team do monitor investment platforms to take note of the various feedbacks.

Parting Thoughts
The dramatic plunge in unit price for LREIT that is more than proportional to the percentage drop in Starhill Global REIT and SPH REIT maybe attributable to concerns over the free cashflow status. Italy is currently undergoing a lockdown that has pushed the country into an expected severe economic recession. Investors maybe expecting a default of the tenant in Sky Complex. However, given that the single tenant is Sky Italia (owned by Comcast Corporation) which is the largest broadcasting and cable television company in the world by revenue, I think that the risk of default is very low. LREIT appears to have been oversold and is being priced ridiculously low. 

P.S: I am vested in LREIT and currently hold around 93,000 units.