Rising Interest Rates Quadrupled Lendlease REIT’s Cost Of Debt 4x From 0.88% (2021) To 3.37% (2024)

When interest rates go up, it becomes more expensive for REITs to borrow money to refinance their loans, which erodes dividends.

This has a negative impact on Real Estate Investment Trusts (REITs), and Lendlease Global Commercial REIT (LREIT) is definitely feeling the heat.

Over the last few years, LREIT’s cost of debt has almost quadrupled, going from 0.88% in 2021 to 3.37% in 2024.

Such a significant increase not only affects borrowing costs but also eats into the dividends that investors have come to expect.

In a previous article, I did a similar exercise for Frasers Centrepoint Trust. This time, let us do it for Lendlease REIT as well.

In case you haven’t realised it, I have a particular penchant for retail REITs and I like to write about the ones that I am interested in.

Cost Of Debt Spiked For Lendlease REIT Since Fed Rate Hikes

Borrowing costs have hovered at a two-decade high for nearly a year and this has placed tremendous stress on REITs. ,

When REITs need to refinance their existing loans (which were secured at a much lower cost in the past), they have to borrow at much higher rates now.

The table below illustrates the average cost of debt of Lendlease REIT since the pandemic days in 2021 to the present day.

The dates listed in the first column of the table correspond to Lendlease REIT’s release of financial results, which shows how harsh the interest-rate environment has been, and why the prices of REITs have tanked.

The cost of debt for Lendlease REIT has almost quadrupled since 2021, going from 0.88% to 3.37%. This eats into the income generated by the portfolio of properties. And yes, it is definitely a little higher than I would have liked.

In comparison, it is still significantly lower than Frasers Centrepoint Trust’s 4.20% as of April 2024, whereas CapitaLand Integrated Commercial Trust (CICT) is clocking in at 3.50%.

In the table above, I have also included gearing and the percentage of debt that is hedged to fixed rate.

Remember that REITs use borrowed money (loans) to manage their daily activities (operations), buy new properties (acquisitions), and improve existing ones (asset enhancement initiatives, i.e. AEI).

This is why gearing, cost of debt and percentage of debt pegged fixed rates are important.

REITs don’t ever fully repay their debts but only service the interest expense on their loans. Therefore, the cost of debt is an important factor affecting REITs’ yield.

Looking at the debt maturity profile, the borrowings are spread out over five years, but of course, a not insignificant portion of debt maturity in FY2025 needs to be addressed.

Expensive Perpetual Securities Adds To The Debt Complexity

In particular, I want to highlight that Lendlease REIT has used expensive perpetual securities that is not reflected in gearing.

Lendlease REIT has launched two tranches of perpetual securities of SGD $200 million each.

The first tranche was issued in May 2021, and the second tranche was issued in April 2022.

• Series 001 Perpetual Securities
  SGD $200 million @ 4.20%
  Issued May 2021
  First Reset Date = 04 June 2026
• Series 002 Perpetual Securities
  SGD $200 million @ 5.25%
  Issued April 2022
  First Reset Date = 11 April 2025

Perpetual securities have no fixed final redemption date and will pay a fixed rate of distribution of every year until the first reset date.

S-REITs were able to somewhat conceal their actual gearing ratio but with adjusted Interest Coverage Ratio (which takes into account hybrid securities such as perpetual securities), the transparency it provides would paint a better picture of debt profiles to investors.

S-REITs are required by MAS to have a minimum adjusted ICR of 2.5x before they are allowed to increase their leverage beyond the prevailing 45% limit (up to 50%).

Therefore, Lendlease REIT leverage limit is capped at 45% (and not 50%) because its adjusted ICR is at 1.9x (which is lower than 2.5x).

Lendlease REIT May Divest Jem Office Tower To Alleviate Its Debt

With regards to Lendlease REIT’s high levels of debt, there has been talk about the potential divestment of some of its assets. In particular, the office component of Jem was mentioned (see here and here).

Currently, the Jem offices are fully leased to Singapore’s Ministry of National Development (MND) under a 30-year lease that runs till 2044, with rent reviews every five years.

Nevertheless, stable cashflow for a strong asset aside (MND is a really solid tenant), the retail component is what I am primarily interested in, and selling the Jem office tower at the right price is a prudent move to manage debt.

Potential Acquisitions Pipeline In The Future

By offloading the Jem office tower, it also paves the way for the potential acquisition of other retail-focused options in Singapore that could be made available via its sponsor.

These properties include Paya Lebar Quarter, Paya Lebar Green, Shaw Tower, Singtel Comcentre and not forgetting the remaining stakes in Parkway Parade of which LREIT already owns 10%.

Having said that, Lendlease REIT CEO, Kelvin Chow, has stated that they are not pressured to acquire when the market condition is not favourable, and the eastern part of Singapore is an area that LREIT would like to focus on.

Healthy Retail Operations For Lendlease REIT Offset Sky Milan Woes

Sky Milan woes aside, LREIT has reported very healthy operational performance in its latest third-quarter FY2024 business update.

• High committed occupancy rate of 99.4%
• Tenant sales and visitation rose 6.1%

I enjoy checking out the retail properties when I’m free, and I have always felt that the vibe at both 313@somerset and JEM feels great when I was there.

Meanwhile, the new Thomson-East Coast Line stations opened on 23 June 2024 and the new Marine Parade MRT station (Exit 1) offers direct access to Parkway Parade.

Sky Italia has made an upfront payment equivalent to approximately 2 years of the prevailing annual rent of Building 3 for returning the building, and it is being repositioned to secure multi-tenancies at market rents.

This has resulted in single-tenant exposure to Sky Italia being reduced from 13.6% to 10.2% by gross rental income (GRI).

Summary

The share price of Lendlease REIT hasn’t been performing well, and the lower DPU was primarily due to higher borrowing costs amidst the higher interest rates as compared to a year ago.

Wrapping up our dive into Lendlease REIT’s financial landscape, let’s distill this article into three key takeaways.

These points highlight the main challenges and opportunities facing the REIT, giving you a quick snapshot of its current position and potential future moves.

• Rising Cost of Debt: Lendlease REIT’s cost of debt has quadrupled from 0.88% in 2021 to 3.37% in 2024, putting pressure on its financial performance and potentially impacting investor returns.
• Potential Asset Divestment: LREIT is considering selling the Jem office tower to manage its debt levels, which could provide financial flexibility for future acquisitions.
• Strong Retail Performance: Despite challenges, Lendlease REIT’s retail operations are showing robust performance, with high occupancy rates and increased tenant sales, helping to offset issues in overseas segment of the portfolio.

More About Lendlease REIT

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