• No financials provided in the operational update. High-single digit reversions were a positive surprise. High occupancy of 99.8% maintained. Slight 3.1% increase in tenant sales.
• Upgrade from NEUTRAL to ACCUMULATE with DDM TP (COE 7.7%) raised from S$0.87 to S$0.97. Estimates revised following a change of analyst. We raise our forecasted contributions for the 31.8% stake in JEM and Grange Road Carpark redevelopment project. FY22e/23e DPU increases by 8.6%/7.7%. TP climbs 11.5% due to the adjustment in earnings and a lower cost of equity assumption of 7.7% (prev. 8.0%). Impending acquisition of the remaining stake in JEM is a catalyst for LREIT.

The Positive

+ 313 bucking the negative reversion trend. 5% of NLA signed in 1Q22 at positive, high single-digit reversions, outperforming negative reversion for downtown malls. This is an improvement compared to the negative double-digit reversions signed in earlier quarters. LREIT has been rebalancing the tenant mix over the past few quarters. The refreshed offerings increased footfall and lifted sales for other tenants in the mall. Tenants were more willing to renew their leases at higher rates given the improvement in tenant sales. Most of the leases signed this quarter were from the F&B sector, located on floors B3 to Level 2. Tenant retention improved QoQ from 61.5% to 90.0%. We understand that most tenants are opting for traditional lease structures, with higher base rent and a smaller GTO component, implying confidence in maintaining and growing sales. About two-thirds of leases are on traditional lease structures.

The Negative

– 1Q22 tenant sales +3.1% QoQ, but still c.70-80% of 2019 levels. Slight improvement in tenant sales attributed to a shorter 2.5weeks dine-in ban in 1Q22, compared to 5 weeks in 4Q21. Footfall increase QoQ by 10.4%.

Outlook

Acquisition of an additional 28.1% stake in JEM in Aug/Sep21 brings LREIT’s stake to 31.8%. The management is optimistic about acquiring the remaining stake in JEM within the next 12 months and is in avid discussions with the remaining investors. The remaining stake of JEM carries a valuation of c.S$1.4bn. Gearing of 34.4% implies a debt headroom of c.S$150mn. LREIT will consider a combination of debt, equity fund raising and issuance of perpetuals to fund the acquisition. If successfully acquired, we expect LREIT to apply for tax transparency status for the JEM entity, reaping tax savings.

All three buildings in Sky Complex are 100% leased to Sky Italia, a broadcasting and cable television company. Sky Complex is Sky Italia’s headquarters and only office location. The asset is on a long lease that expires in May 2032, with a lease break option in 2024, subject to a one-year notice period. In-place rents are c.30% below market rents, implying possible positive reversions if the lease break is executed.