Lendlease Corporation, part of the Australian-based Lendlease Group, is spinning off a REIT with two of its properties. Called the Lendlease Global Commercial REIT (the REIT), it will start off with 313@Somerset in Singapore and Sky Complex in Milan, Italy.
So let us take a rough look.
Quick numbers from the prospectus (with page number in brackets for reference):
- Initial public offering (IPO) price: S$0.88 (p46)
- Net Asset Value (NAV): S$0.8134 (p55)
- Aggregate Leverage: 36.4% (p97-98)
- Projected dividend yield: 5.8% (annualized) for 2020, 6.01% for 2021 (p57-58)
- Weighted Average Lease Expiry (WALE): 4.9 years by Gross Rental Income (GRI), 10.4 years by leased Net Lettable Area (NLA) as at June 2019 (p8)
- Committed Occupancy Rate: 99.9% as at 30 June 2019 (p8)
The Properties, Tenants And Rentals
The REIT will have two properties, namely the leasehold retail 313@Somerset which almost all of us are familiar with, and the freehold office Sky Complex situated 5km from the Milan city centre in a new district called Santa Giulia. As at 31 July 2019, 313@Somerset stood at 71.5% of the REIT portfolio’s appraised value, while Sky Complex took up the remaining 28.5%.
313@Somerset sits on top of Somerset MRT station in the Orchard Road shopping belt and has a mixed bag of retail shops and food & beverage outlets, with brands like Zara, Cotton On, Marche and Food Republic among them. As at 30 June 2019, 58.9% of the leases by NLA have an average rental escalation of 3% for FY2020 due to the rental step-up structures in place.
The entire Sky Complex is currently leased to Sky Italia, an Italian satellite TV platform and subsidiary of broadcaster Sky Limited, which in turn is under the Comcast Corporation. Sky Italia accounts for 28.9% of the REIT’s GRI, and the rental will increase annually based on the official Italian Consumer Price Index (CPI, a measure of inflation). The lease will be until 2032, with Sky Italia having the option to terminate it in 2026.
Some Highlighted Reviews
As a proponent of diversification, the concentration of a single tenant, albeit it is a reputable company, in the Italian property is a bit unsettling for me. Should Sky Italia exercises its option to terminate the lease in 2026, then it will be a headache to fill that void. However, Sky Italia also has the option to purchase the property should the REIT wants to sell (prospectus p69), so this may somewhat mitigates the risk mentioned if they decided to buy. Also, the sponsor by then would have purchased additional properties to reduce the concentration.
Speaking of the sponsor, its parent Lendlease Group is no stranger to huge construction projects and properties around the world. In Singapore, it has Paya Lebar Quarter, JEM and Parkway Parade under its belt. Globally, it has a foothold in various gateway cities such as New York, London and Beijing. So there is potential of quality property injections in the days to come.
And there is another piece of good news: The rental proceeds from Sky Complex are (so far) exempted from the Italian withholding tax and Singaporean income tax, according to this excerpt from the prospectus (p51):
In respect of the Milan Property:
(a) a ruling has been obtained from the Italian tax authority which confirms that distributions derived by Lendlease Global Commercial (IT) Pte. Ltd. (“IT SingCo”) from the Italy AIF qualify for withholding tax exemption in Italy; and
(b) IT SingCo has obtained a tax exemption from the Ministry of Finance (“MOF”) in respect of foreign distribution income derived from Italy AIF (“Specified Exempt Income”) (the “Tax Exemption”). Pursuant to the Tax Exemption, IT SingCo will be exempt from Singapore income tax on the Specified Exempt Income.
This means we should be getting the dividends from the Italy portion as "it is", though there may be some regulatory risks if rules change. Furthermore, if the sponsor decides to inject more properties from other countries, we may have to content with different sets of tax laws respectively.
The Bedokian’s Take
At S$0.88, it is about 8.2% above the initial book value of the properties, but I would view it as a premium for future expandability. Starting off small, investing in this REIT is like watching a plant grow and over time gaining more leaves and branches (assets) from the nutrients in the soil (sponsor).
With an aggregate leverage of 36.4% (which is a rough gearing gauge to me), there is still some headroom to go to the current 45%, more so if the allowable gearing limit goes up. Even then, we should expect the high possibility of rights issue, which is not necessarily a bad thing to go for if an investor feels the incoming assets are yield accretive.
The REIT’s yield is around five-plus to six percent for the next two years, and based on data from the Reitoracle (www.reitoracle.com) and Reitdata (www.reitdata.com) sites as at 21 Sep 2019, it belongs to the median range in yield amongst the S-REITs. Comparing to the REIT’s commercial peers (office and retail combo REITs) of similar balance and make-up, the yield is around that of currently Mapletree North Asia Commercial Trust’s and Starhill Global’s.
And finally my take for this REIT is (and as usual anti-climatic): it depends. This REIT has the potential of having a global (and geographically diversified) exposure, but along with it comes risks such as geographical (think recession in a country), regulatory (think taxes and land laws), tenant and of course the unescapable market. This is part and parcel of being an investor, so we have to live with and manage the risks in order to get returns.
The IPO is open for application on 25 Sep 2019 and closes on 30 Sep 2019, and the REIT will be listed on 2 Oct 2019, subject to changes if any.
Lendlease Global Commercial REIT Prospectus, lodged 16 Sep 2019, Monetary Authority of Singapore OPERA site – https://eservices.mas.gov.sg/opera/Public/CIS/ViewProsDetail.aspx?prosID=514fd34d0f3047ed8dea69cbe0e05a33