+ Retail recovery on track. Tenant sales have increased by 355.5% YoY at the portfolio level due to acquisition of Jem. Despite the slow return of Chinese tourists, tenant sales were still at c.120% of the pre-pandemic level since 80-90% of the sales are contributed by local demands. Portfolio occupancy remained strong at 99.8% (-0.1% YoY). As only 1.4% of leases expire in FY23, we expect the occupancy rate to remain stable. The retail side generated a positive rental reversion of 3.3% (+1.3% QoQ) while office rental escalation remained unchanged at 4%. With higher sales driving occupancy cost below average by c.3-5% at the portfolio level, there is still upside for the rental reversion.
– The cost of debt has increased to 2.51% (+0.16% QoQ, +1.53% YoY). After the refinancing of the €285m loan in FY24, we expect the overall cost of debt to increase to c.3% and further deteriorate the adjusted interest coverage ratio (ICR) to c.2.1x. The gearing ratio is 39.3% (+0.1% QoQ, +11.6% YoY). As 61% of the borrowing is hedged for the next 18 months and there will be no refinancing risks till FY25, we expect the gearing to remain at its current level.
In order to maintain gearing, we believe inorganic growth is unlikely unless LREIT is willing to take equity fundraising. However, there are still catalysts generated by organic growth, such as the additional 10,200 GFA at 313@Somerset. Upon full deployment, this could lift the NPI by 2-3%. We also expect rental reversion from the retail side to remain positive.