Is Lendlease REIT a buy at 9% dividend yield?

What happened?

Many REIT investors might be familiar with Lendlease Global Commercial REIT (SGX:JYEU), which owns the 313@Somerset and JEM malls in Singapore.

Recently, Lendlease REIT reported its full full-year results for FY2023. As compared to most S-REITs that reported 1H 2023 results for this earning season, Lendlease REIT is slightly different as its financial year ends in June. 

For FY2023, Lendlease REIT reported a distribution per unit (DPU) of 4.70 cents. This was lower than the 4.85 cents reported in the previous year. 

While Lendlease REIT’s gross revenue and net property income rose compared to the previous year, distributions declined in FY2023. 

Following the results, we examine if Lendlease REIT is a good buy for investors looking to build their dividend portfolios. 

What investors may like about Lendlease REIT (SGX: JYEU) 

#1 - Leasing activity remains strong for Lendlease REIT

Lendlease REIT's portfolio occupancy rose to 99.9% in FY2023 from 99.8% in FY2022. This was mainly due to the retail portion of JEM being fully rented out but mitigated by the slight decrease in the occupancy of 313@Somerset.

For FY2023, Lendlease REIT recorded positive rental reversions for both its retail segment and office segment, at 4.8% and 5.9% (for Sky Complex) respectively.  Tenant retention was also healthy at 82.4%.

#2 – JEM contributes positively to Lendlease REIT

With Lendlease REIT’s FY2023 results, we saw the full-year financial effect of JEM.

In addition to the positive impact on the financial performance of Lendlease REIT, JEM also diversified Lendlease REIT's revenue composition.

JEM now contributes 61% of Lendlease REIT’s total gross revenue, with 313@Somerset contributing 27% and Sky Complex contributing 12%. 

This was a stark difference as compared to pre-acquisition where 313@Somerset contributed 66.6% and Sky Complex contributing 33.4%.

In terms of geographical revenue, Singapore now contributes around 87.8%, while Italy contributes around 12.2%. This was a significant shift as compared to FY2022 where Singapore contributed 75% and Italy at 25%.

What investors may not like about Lendlease REIT (SGX: JYEU) 

#1 - Lendlease REIT’s debt levels went up

Despite the higher occupancy and increased contribution from JEM, Lendlease REIT’s DPU fell due to higher borrowing costs due with an increase in interest rates.

If we look at the financial statements, we can see that finance costs rose by almost 220% as compared to the previous year.

Lendlease REIT’s average debt cost rose by 100 bps, from 1.69% per annum in FY2022 to 2.69% per annum in FY2023.

Lendlease REIT’s gearing ratio also increased to 40.6% as at June 2023 from 39.3% as at March 2023. 

However, we need to take into account that the gearing ratio is not inclusive of Lendlease REIT’s two tranches of perpetual securities. If those were taken into account, gearing would instead be at around 51%.

Furthermore, Lendlease REIT’s adjusted interest coverage ratio (ICR) for FY2023 stands at 2.0 times. 

This means that Lendlease REIT’s gearing ratio limit (not including the perpetual securities) would be at 45% instead of the regulatory limit of 50% (which requires an adjusted ICR of at least 2.5 times).

Looking ahead, finance costs for Lendlease REIT may rise further given that only 61% of its borrowings are hedged to fixed rates. 

On the bright side, Lendlease REIT has no refinancing needs till FY2025 as its Euros loan due in FY2024 has been refinanced to FY2028. 

With the refinancing completed, Lendlease REIT’s weighted average debt maturity would rise to around 3.4 years. Lendlease REIT would also have around S$162.6 million of undrawn debt facilities post-refinancing.

#2 – High debt levels could limit growth opportunities

Lendlease REIT recently acquired a 10% stake in Parkway Parade Partnership Pte Ltd, giving it an effective ownership of 7.709% in Parkway Parade. 

Previously, we saw that when Lendlease REIT acquired JEM, it started by first owning small stakes before completing a full takeover.

However, should Lendlease REIT decide to increase its stake in Parkway Parade significantly, there is not much room to maneuver due to its high gearing ratio currently which offers it a debt headroom of just around S$168.3 million.

Thus, there may be potential equity fundraisings in the future to fund any major acquisition that Lendlease REIT could undertake.  

Apart from acquisitions, Lendlease REIT is looking to grow its distributions by developing Grange Road carpark into a multifunctional event space. This is expected to start in the third quarter of 2023 and completed by mid 2024.  

What would Beansprout do?

Based on Lendlease REIT’s share price of $0.675 as of 8^th August, it is expected to offer a forward dividend yield of close to 9% according to Yahoo Finance data. 

This is higher than some of the other retail REITs such as Fraser Centrepoint Trust (7.3%) and CapitaLand Integrated Commercial Trust (5.5%).  

The operational performance of Lendlease REIT’s assets remains strong, with close to 100% occupancy at its retail mall in Singapore. 

However, investors should be watchful of the relatively high debt levels of Lendlease REIT, as its gearing level has gone up to above 40%. 

This has led to higher borrowing costs which have been a drag to distributions, and could limit the ability of the Lendlease REIT to make potential accretive acquisitions without an equity fundraising in future. 

Check out Beansprout’s REIT tool to compare Lendlease REIT and Frasers Centrepoint Trust and choose the best REIT for your portfolio.

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Related links:

• Lendlease REIT share price performance
• Lendlease REIT analysis
• Lendlease REIT dividends