• 3Q21 tenant sales and mall visits recovered to 94% and 77% of 3Q20 levels. Rental reversions were less negative. Financial impact of Code of Conduct expected to be immaterial.
• Higher construction costs likely for Grange Road Carpark redevelopment. Shelved AEI for 313 to proceed in stages to ensure minimal disruptions to footfall and sales.
• Maintain ACCUMULATE and DDM target price of S$0.82 (COE 8%).

The Positives

+ Tenant sales recovered close to pre-Covid levels; improved leasing. 3Q21 tenant sales and number of mall visitors recovered to 94% and 77% of 3Q20 levels. The greater recovery in tenant sales was underpinned by growth in February and March. The leasing of 313 recovered slightly. While rental reversions were still negative, they improved QoQ. 313’s occupancy remained high at 98.6%.  

+ Minimal impact from Code of Conduct. Introduced on 26 March 2021, the Code of Conduct for the leasing of retail premises in Singapore provides guidelines for the negotiation of lease agreements in 11 areas, including rental structure, third-party fees, pre-termination by landlords or tenants and data-sharing. LREIT believes the impact will not be big as its current practice is already largely in line. Any effect will take the form of slightly lower rental and utility income from some leases contracted after 1 June 2021. The overall impact on FY21-22 net property income is expected to be less than 1%.

+ Event space at Grange Road Carpark substantially leased to Live Nation. The new multifunctional event space adjacent to 313 has been substantially leased to Live Nation, one of the world’s leading live entertainment companies, as anchor tenant. Development is expected to commence in 2H21 and be completed in 2022. There are future upside opportunities if we consider joint marketing and cost synergies with 313.

The Negative

– Higher development costs expected for redevelopment. Due to costlier labour, additional PPE and safe distancing at work sites, the cost of redeveloping the Grange Road Carpark could increase. LREIT had also originally planned to improve the plot ratio at 313. This AEI, though, was temporarily shelved due to Covid-19. Considering the potential increase in development costs, LREIT has decided to unlock the additional gross floor area in stages. This is to ensure minimal disruptions to the mall’s footfall and sales. We expect AEI contributions to valuations to be delayed till FY22.

Source: Phillip Capital Research - 10 May 2021