Tuesday, May 5, 2020

5 Reasons Why I Think Lendlease Reit Is The Real Deal

I've been accumulating quite a bit of Lendlease Reit over the past month and is currently my second biggest holding in the portfolio.

In the past recent weeks, we've seen some solid rebounds in most of the equities in the market and it seemed to benefit everyone who has vested in the market.

My current position in Lendlease Reit is up close to 17% but I think they still provide good value which I am likely to continue accumulating for more.

Here's why I think they are the real deal:

1.) Crown Jewel Assets (Somerset 313 & Sky Complex)

I consider Somerset 313 to be a crown jewel asset in the portfolio as it currently hosts one of the most visited malls across the Orchard Road street.

The other two that are unparalled on comparison are probably Ion Orchard and Plaza Singapore (owned by CMT) , both of which championed 100% occupancy.

Sky Complex in Milan is an unfamiliar territory for most of us because its further away from us and being a commercial office, it is not that easy for retail investors like us to gauge how good the property is. It is currently tenanted to a commercial tenant on a very long lease.

2.) Triple Net Lease

NNN Leases are considered to be one of the most sought after investment leases because i.) you get to lease to a high quality investment grade tenant, ii.) you get a long lease wale out of them and iii.) you get tenants to incur and bear all the related costs pertaining to property management fees, property taxes, insurance and maintenance.

The actual deal might defer a bit depending on the agreement that is signed but that's generally the term.

You hardly and most probably won't get an eht default sort of situation because your tenant is likely to be A investment grade client.

In fact, I'll go further to say that this is almost a bond linked investment option alike with an equity yield.

I think the market is over-discounting this fact too much for the Covid uncertainty which is quite temporary in nature.

3.) Borrowing Costs at 0.86%

This is hands down winner.

You have the Somerset 313 that are contributing 2/3 of the revenue while Sky Complex contributing the other 1/3 of the revenue but their cost of borrowing is cross-swap.

The Reit actually borrowed 80% of the loans ($446m) in euro denominated fixed loans at 0.56% rate while taking the other 20% of the loans by putting collateral of the smaller portion of Somerset at $100m at 2.09% per annum.

The blended mix borrowing costs is a 0.86%, which is one of the lowest you can find throughout the Reit universe (think only Plife Reit with Japan denominated loans can be cheaper). Even Ireit borrowings are at around 1.5%ish through their denominated loan which they took years ago.

This goes to show how cheap borrowing costs are and will be in the next few years of era for Reits.

4.) Dividend Yield at 8.6%

Assuming normalised DPU at 1.25 cents/quarter (Sky Complex is safe, only Somerset rental will have temporary dip due to Covid), this will translates to 5 cents dpu/ year.

At current price of 57 cents, this would mean we are getting a yield close to 8.6% for what I think is a really solid Reit.

Sure we probably won't get the 8.6% yield right now but in a year or two, I'm sure things will pick up and we are going to get normalised dpu again very soon.

After all, I'd rather get a temporary dip in dpu but able to buy at a much lower a valuation than get a confirmed yield but at a much higher valuation with little margin of safety (this is the case when they first ipo and everyone was rushing to buy this).

5.) Capitalization Rates

Cap rates are currently at 4.5% for Somerset and 5.75% for Sky Complex.

The Somerset compares in line with the rest of the quality malls such as Vivo City or Plaza Singapura which is also at 4.5% cap rates.

Overseas commercial offices tend to have higher cap rates than local offices, so they give a higher rental yield.

Final Thoughts

There's a few Reits that are definitely ahead in the queue in front of Lendlease and some of the names I could think of are the likes of CMT, MCT, MIT which is also under my radar as well.

And Lendlease does have certain risks such as currency exposure to the Euro and the rejuvenation of Orchard road being the weak link to that.

But when I consider every aspect from the risk to reward, there are very little Reits that can beat the attractiveness of Lendlease so far. Because of this, I will continue to accumulate this Reit given the right opportunity to do so.

Thanks for reading.
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  3. Hi B, I have a small position in lendlease too. I have been looking into whether I should add on to this stock or buy other reits.
    I am not as optimistic as majority of the reit's revenue is from 313 Somerset. Being located in the town area, it will probably recover its footfall traffic and sales at a slower pace compared to heartland malls. This may result in tenants pulling out affecting NPI. Luckily, they have just 1% of the lease to renew for FY2020.

    It is certainly insightful reading your perspective on this reit.

    1. Hi MIM

      I don't think Somerset 313 is going to have difficulty signing tenant. If you look across its historical across together with Plaza Singapura history, you would find that they always have long lists of tenants that are awaiting so I am actually very positive on the location of the malls.

  4. Do you see the sponsor injecting more property into the REIT? Namely Paya Lebar Sq?

    1. Hi Mhleonard

      I would think yes in due course but not so fast. I don't think the Lendlease developer themselves have the majority for PLQ, if I'm not mistaken it's only 30% stake so it will take time.

  5. Would be interesting if it include Parkway in the near future

  6. There are so many better than this? I think ireit global and ascott are better than this one, JMO

  7. HI Brian,

    Yeah I have been adding Lendlease Reit when it drop around $0.50+ levels.

    Even at its IPO price I felt that it's worth subscribing as well.

    The commercial building rent to Sky Italia is on a Triple net lease and a long lease as well.

    Even with Covid 19 they can still go above forecast. Credits really go towards good management.

    Most important I like the management and sponsor. Just look at the shopping mall t they own: JEM, Parkway Parade, PLQ. It's always so crowded during pre Covid19 days.
    I hope the management can inject such properties into Lendlease Reit.

    Understand that the interest rate is low; but with interest rates to all time low, wouldn't it be common in future for reits with good credit rating to be able to refinance their debt at a extremely low rate, like Parkway Life Reit.

  8. Hihi!

    Thanks for sharing your view on lendlease. It is also currently under my watchlist.

    Will like to ask what is your view on the management team? I understand that they are previously from Keppel Reits and previously they are known to not have the interest align with the shareholder. Are you concern about this area?

  9. one of my concerns is whether the parent (which is listed in ASX and answerable to a different set of shareholders) is just using the REIT to recycle assets that it doesn't want while keeping the good assets for itself.

    Sky Complex appears to be part of the Milano Santa Giulia 'urban regeneration scheme' and there is obviously some 'risk' involved in investing in such area. On the other hand, such schemes are hopefully socially beneficial to the community by bringing jobs to depressed areas.

    I'm not saying its a EHT situation, more like you are not likely to seeing market outperformance from the REIT if its pipeline is simply to buy properties that Lendlease has built/was involved in building?

    In Singapore, I solve the problem by buying both the parent (Frasers/Capitaland) and their REIT.

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