Monday, 7 June 2021

Lendlease Commercial REIT Diversification Into Suburban Shopping Mall- Additional Acquisition of JEM

Lendlease Commercial REIT ("LREIT") just announced a proposed additional acquisition of stakes in Jurong East Mall (JEM)  for S$204.1Mil from 2 funds holdings shares in it. LREIT has also offered up to another S$178.2Mil to other 3rd party investors in the Lendlease Asian Retail Investment Fund 3 Limited for up to another 19.8% interest stake if they are keen to sell off their stakes. This will raise LREIT's overall stake in JEM from 3.75% (purchased in Oct''20) to 31.8%. In a way, LREIT seems to be struggling to obtain a 51% majority stake in JEM due to the different external unit-holders holding a single completed property.  

Some key highlights to note:

1. Future M&A exercise going forward is expected to progress at a snail's pace similar to current situation since IPO
One thing that I do not like about the way Lendlease group funded its developments in Singapore is the use of several funds to hold a single development project with multiple major stakeholders taking part in it. This is similar for its current Singapore holdings such as Parkway Parade and Paya Lebar Mall & offices.

Hence to do a 100% acquisition of a single property at any one time is almost impossible due to different investment objectives of the shareholders in each of the investment fund holdings stakes. JEM is a perfect example of a bite size acquisition gradually over time to buy out 3rd party stakes if they decided to offload it at different periods in the future.

Such piece-meal acquisition is no doubt a waste of money as professional fees such as legal fees and valuation fees will need to be incurred again and again albeit is of a small amount relative to the overall valuation of the piece-meal purchase considerations.

2. The JEM acquisition move beneficial to LREIT?
Yes. this acquisition of additional stakes in JEM is expected to be 3.6% DPU accretive. The acquisition is expected to be funded by proceeds from its recent issuance of S$200Mil of perpetual securities, existing cash balances and debt facilities. 

2(i) Perhaps the best part of JEM is that its office component is 100% fully leased to our Ministry of National Development on a 30 years lease. Currently, 24 years of the lease remains. Taking into account its other office portfolio Sky Italia in Milan (also leased to a strong tenant), its office portfolio will provide resilient streams of rental income even during economic downturns. 

The office components post acquisition will mean LREIT having a 28% business segment that is resilient to major economic crisis. This is a hidden gem in the JEM acquisition.

2(ii) JEM's suburban retail mall has established itself as one of the dominant retail mall in Western Singapore with a direct access to Jurong East MRT station. JEM is well tenanted with a high overall committed occupancy of 99.7% as at 31 March 2021. Essentail services trade mix such as F&B services, supermarket and hypermarket account for 58% of its Net Lettable Area. 
Breakdown of New Portfolio by Asset After Acquisition

Breakdown of Portfolio by Asset Segment After Acquisition

The acquisition of JEM thus allows better portfolio diversification from its crown jewel 313@Somerset at Orchard Road which in theory should bring the expected risk premiums down from the current market valuation.
3. Changes in LREIT Senior Management from 1st June 2021-Good or Bad?
LREIT's chairman, Mr Anthony Lombardo has stepped down as chairman to become the Group CEO of Lendlease Group with effect from 1 June 2021. However, he will remain on the board of LREIT as a non-executive director. 

Ms Ng Hsueh Ling will take over as chairman of LREIT. She has been the Singapore MD and chief investment officer at Lendlease since 2017 and is also the key executive of Lendlease Retail. Ms Ng was also previously the CEO of Keppel REIT's manager and also ex-CEO of Ascendas Korea & Japan just before joining Lendlease group. 

Good to see LREIT is still in good hands and as a matter of fact, even stronger connection to its Australian sponsor from the designation change.

Parting Thoughts
Based on projected forward dividend yield (over next 12mths) of at least 7.1%, the current market valuation of S$0.77 per unit appears to be still giving a good return considering LREIT's main portfolio components are focusing on providing retail space and also office properties backed by superstar tenants in Milan and Singapore.