Lendlease REIT Plunged 11.6% Since Beginning Of The Year-Curse of the JEM Acquisition.

Ever since the announcement by Lendlease Global Commercial REIT ("LREIT") on 14 February 2022 (Valentine's Day coincident release?) that it will be acquiring the remaining stakes in JEM, its unit price has taken a wallop. No, this is not just the impact of the Ukrainian Russo war or global interest rate hikes, but some investors seems to be upset at certain aspects of the deal such as the upcoming issuance of so many new units which reduces the NAV of LREIT to a mere S$0.80 per unit. For most companies, if they announced a mega deal, prices theoretically should go up but LREIT went all the way down from its S$0.90 per unit at beginning of the year till it hits an all time FY2022 low of S$0.795 per unit on 8th March 2022 a day after the EGM. So what exactly happened to LREIT? A mega-deal now became its Achilles heel and curse? 

1. Main query by some unhappy unitholders to directors of LREIT-NAV  decline to S$0.80 per unit

NAV per share declined to S$0.80, which is not better for unitholders as it means that that acquisition price is too high. The drop is due to the high number of new units to be issued. However, considering the fact that NAV per unit before the acquisition for FY2021 is only S$0.81 per unit, I think one can actually live with this slight drop. It is strange that after the EGM on 7th March 2022, the price did not even bounced up. 

Personally, I thought that the Profit Before Tax is the most important as it will determine the ultimate distribution payout (DPU) to unit-holders-please see paragraph 2 below.

2. Distribution Yield improves by 1% point from 5.2% to 6.22%

This is where it gets very interesting. Price per unit of LREIT is around S$0.90 at the beginning of the year. At a pre-acquisition DPU of S$0.0468, this represented a yield of only +5.2%. However, prices after the EGM hovers around S$0.800- S$0.805 per unit. If we further add in the impact of GEM acquisition, this will boost the DPU to S$0.0501 per unit. This is a yield of +6.22%. For passive income investors, LREIT suddenly seems to be a better deal considering other REITs such as Capitaland Integrated Commercial Trust distribution yield is only around 5%. 

In addition, the GEM acquisition adds much needed diversification into LREIT's only 2 properties of Sky Complex and Somerset 313 @ Orchard. LREIT's new offices of Sky Complex in Italy and GEM Offices now consists of 2 extremely resilient recurring rental income streams from Sky Italia, a subsidiary of Comcast Corporation (one of the world's largest broadcasting and cable television company) and also the Ministry of National Development of Singapore respectively. 

However, there are some some worrying points to take note of- please see paragraph 3 below. 

3. Issuance price and sufficient cash on hand to avoid dilution 

(i) One unknown factor of concern to me is how low the rights issue of units will get priced. The illustrative example used  in the presentation materials states that this is S$0.82 per unit. Obviously, if one is going to issue at S$0.82 per unit when the market price is only S$0.805, this rights issue will never work. Why would one subscribe to a higher priced rights issue when one can get it from the market at a lower price?

Extracted from "Reponses to Questions from Unit-holders" by LREIT Management-1st March 2022

(ii) The other worrying part is that to acquire the remaining 68.2% in JEM, LREIT will need to raise financing of S$1,790Mil. This is an enormous eye popping sum. The elephant in the room is how much is the share of contribution for retail investors like us who do not have deep pockets. From the above extract, it seems that 40% (S$718Mil) of the required funds will need contribution from all unitholders (excluding the Sponsor). If including the sponsor's share and the recent approval to issue up to 1,265 Mil units, price of new units can go down to S$0.752 per unit.

(iii) Last but not least, for retail investors who entered at S$0.90 per unit at the beginning of the year and no longer has any spare cash, it will not be fair if latter institutional investors or existing investors managed to get new units at say S$0.752 per unit. Retail investors thus need to commence raising cash on hand position to prepare and participate in the upcoming preferential retail tranche rights issue. 

 

Parting Thoughts

Based on the above, the JEM acquisition can be either a curse or a blessing in disguise depending on when one bought into LREIT. Personally, I think that the current price of S$0.805 per unit seems to be relatively more attractive to some of the other retail & office REITs out there on SGX. There will also be recurring tax savings of S$5.6 million per annum due to the restructuring of the fully acquired GEM into the REIT structure. I do not mind earning a 6.2% distribution yield annually while waiting for capital appreciation upsides.