Lendlease REIT dividends hit by higher debt cost. Here's how it is coping with interest rate changes

Lendlease REIT recently reported its earnings and dividends for the second half of fiscal year 2024 ending 30th June 2024. 

Following the results, we spoke to Kelvin Chow, the Chief Executive Officer of Lendlease REIT at a Corporate Connect webinar hosted by SIAS.

We find out more about Lendlease REIT’s prospects, and what they may mean for the company's dividends in the coming years.

Lendlease REIT FY2024 Financial Results Presentation 

1.  Overview of Financial Performance

• Gross Revenue: Increased by 7.8% YoY to $220.9 million, driven by strong performance from Singapore assets and supplementary rent from the Sky Complex lease restructuring.
• Net Property Income (NPI): Grew by 7.4% YoY to $165.3 million.
• Distributable Income: Decreased to $91.4 million, with distributions per unit at 3.87 cents due to higher borrowing costs.

2.  Capital Management:

• Cost of Debt: Increased to 3.58% from 2.69% YoY.
• Gearing Ratio: Stood at 40.9% 
• Fixed Rate Hedging: Increased to 61% by year-end, further raised to 70% post-year-end.

3.  Portfolio Metrics:

• Occupancy Rates: Improved overall to 89.1%, with retail portfolio at 100% and office portfolio at 80.9%.
• Retail Performance: Tenant sales increased by 0.2% YoY, with a 14% rental reversion.
• Lease Expiry: Well-distributed with an average lease expiry of 7.5 years by NLA.

4.  Portfolio Performance:

• Singapore Assets: GEM achieved full occupancy, and 313 at Somerset improved to 99.9% occupancy.
• Sky Complex in Milan: Occupancy stood at 73.9%, with ongoing repositioning and leasing efforts.

5.  Asset Performance:

• Sky Complex: Ongoing repositioning of Building Three for multi-tenancy. Office rental uplift expected for Building One and Two.
• GEM Office: Fully leased until 2044, with a rental review expected in December 2024.
• Retail Assets: GEM and 313 at Somerset recorded full occupancy, with tenant sales and visitations increasing slightly.

6.  Financial Highlights:

• Balance Sheet: Total assets at $3.8 billion, with NAV per unit at 76 cents.
• Debt Maturity: $360 million loan due for renewal in FY2025, with discussions ongoing for refinancing.

7.  Portfolio Valuation

• JEM: Valuation increased by 3%.
• 313 at Somerset: Valuation increased by 1.3%.
• Sky Complex: Valuation declined due to higher cap rates and lower occupancy in Building Three.

8.  Sustainability Initiatives:

• GRESB Results: Maintained global and regional sector leader status with five-star ratings.
• Green Building Certification: 100% of Lendlease REIT's portfolio is certified.

9.  Outlook and Key Focus Areas:

• Proactive Asset Management: Focus on lease rental review for JEM office.
• Prudent Capital Management: Manage refinancing of upcoming $360 million loan.

Q&A session with Lendlease REIT

Question: Given the high-interest rate environment and the need to maintain a certain interest coverage ratio, how does the company intend to address this challenge?

Answer from Lendlease REIT: 

The company acknowledges the current high-interest rate environment and notes that we may be near the peak of the interest rate cycle, with expectations of future rate cuts. 

The inverted interest rate curve provides an opportunity to hedge positions at lower long-term rates. 

Currently, the company's interest rate hedge ratio is at 61%. 

The company emphasises the importance of a strong portfolio performance, which includes high rent reversions (14%), strong tenant retention, and high occupancy rates, all of which will help in negotiating better refinancing terms with banks and maintaining a lower interest rate margin.

Question: What if the anticipated interest rate cuts by the Fed do not materialise? How will the company cope with elevated interest rates?

Answer from Lendlease REIT: 

The company believes that the key to surviving challenging macro environments is strong asset management and focusing on the right markets. 

The company does not see macroeconomic conditions as something that would destroy a REIT, as long as the assets are well-managed and positioned correctly. 

The management’s actions are critical in navigating uncertainties, and the company is focused on ensuring it remains resilient and the "last man standing."

Question: How does the company plan to manage the cost of perpetual debt, especially considering potentially cheaper funding sources?

Answer from Lendlease REIT: 

The company is considering various options to manage the cost of perpetual debt. The first perpetual debt is due in April next year. 

Depending on the trajectory of interest rates, the company may choose to roll over the existing debt for a short period or refinance it with cheaper funding sources. 

The company is also considering converting the perpetual debt to traditional debt, which would increase gearing but remain within regulatory limits, potentially lowering overall funding costs.

Question: How does the company view acquisitions in the current elevated interest rate environment?

Answer from Lendlease REIT: 

The company believes that acquisitions are still meaningful, particularly by leveraging the strength of its sponsor, which has a significant portfolio of assets in Singapore. 

The company intends to focus on growing its Singapore asset base, which aligns with the preferences of its unit holders. The strong pipeline of assets from the sponsor provides opportunities for growth, and the company will carefully evaluate acquisitions to ensure they add value for unit holders.

Question: Are there any plans to acquire Paya Lebar Quarter?

Answer from Lendlease REIT: 

Paya Lebar Quarter is one of the assets under consideration, but the company has put the acquisition on hold as it does not currently meet certain criteria outlined in the IPO prospectus. 

The company maintains close oversight of the asset’s performance and will consider acquisition when it aligns with the company’s strategic goals and provides value to unit holders.

Question: Is there an opportunity to increase the company’s stake in the Parkway Parade asset?

Answer from Lendlease REIT: 

There is potential to increase the stake in Parkway Parade, but it is not a priority at the moment. 

The initial acquisition was made to capitalise on growth opportunities related to infrastructure developments around the asset. 

The company is carefully observing the asset's performance and will consider increasing its stake when it can be done in a way that creates positive value for investors.

Dive deeper into the Lendlease REIT REIT with our checklist and find out if it may be worthwhile adding the REIT to your watchlist. 

To learn more about our outlook on Singapore REITs, read our detailed report on "Singapore REITs - Distributions may remain under pressure"

Related links:

• Lendlease REIT share price and share price target
• Lendlease REIT dividend forecast and dividend history

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