Lendlease REIT Improves Suburban Retail Exposure By Acquiring 10% Of Parkway Parade Partnership

Shortly after I had written my thoughts on whether to invest in Lendlease REIT last week, it surprised me with an announcement yesterday on their acquisition of part of Parkway Parade.

I thought that Lendlease REIT would already be finding it hard to stomach Jem at the moment, with high interest rates weighing on its shoulders – but I guess I was proven wrong (for this tiny purchase).

History of Parkway Parade

Parkway Parade Shopping Centre is a property with a long history, considering that it officially opened in March 1984, but it has undergone various asset enhancements since then which has kept it up to date with the times.

At the time of completion, Parkway Parade was one of the first suburban shopping malls in Singapore.

Parkway Parade is a mixed-use (retail and commercial office), strata-subdivided development with multiple ownership.

• 17-floor office tower
• 7-storey shopping mall with a basement

In 2000, Parkway Parade was acquired by Asia Pacific Investment Company No. 2 Limited (now Parkway Parade Partnership Limited), a fund managed by Lendlease.

Parkway Parade Ownership

Parkway Parade Partnership (PPP) owns 291 strata lots which represent 77.09% of the total share value of the strata lots in Parkway Parade.

Quintique Investment Pte. Ltd. (“QIPL”) and Prime Asset Holdings Limited (“PAHL”) are indirect wholly-owned subsidiaries of PPP.

• QIPL
  • 27 strata lots of office space (4.30%)
  • 5 strata lots of retail space (0.46%)
• PAHL
  • 259 strata lots of retail space (72.33%)

Lendlease REIT’s acquisition of 10% of PPP represents 7.7% of the total share value of the strata lots in Parkway Parade.

Reasons to Like Parkway Parade Shopping Centre

Parkway Parade’s catchment is firmly in the suburban areas so this will increase Lendlease REIT’s exposure to the resilient suburban retail segment.

More importantly, one of the pet peeves of Parkway Parade is the lack of direct MRT access – which will be improved in 2024 with the upcoming Marine Parade MRT station (stage 4 of the Thomson–East Coast MRT line) will channel more footfall to Parkway Parade and strengthen its position as a dominant suburban retail mall in the eastern part of Singapore.

Having easy access to other channels is great, but nothing beats direct MRT access.

If you look closely at Frasers Centrepoint Trust for example, you’d notice that it has gradually sold its properties (Anchor Point) without direct and easy MRT access — no prizes for guessing why.

Parkway Parade Valued at S$1,380 million

The agreed Market Value was negotiated on a willing-buyer and willing-seller basis with reference to the independent valuations by Savills Valuation and Professional Services (S) Pte Ltd and Jones Lang LaSalle Property Consultants Pte Ltd (“JLL”).

It is equivalent to the independent valuation of JLL, being the higher of the two independent valuations as of 30 April 2023.

Lendlease REIT’s existing portfolio has an appraised value of S$3.6 billion, so this small acquisition isn’t that hard to stomach.

Apart from the acquisition fee to be paid in the form of units, the total acquisition cost has been financed through debt facilities and Lendlease REIT’s internal resources.

SGD$90.5 million acquisition cost breakdown

The purchase consideration of SGD$88.9 million.

SGD$0.9 million acquisition fee is payable in Lendlease REIT units to the manager.

Estimated professional and other fees and expenses incurred or to be incurred by Lendlease REIT in connection with the acquisition will amount to SGD$0.7 million (inclusive of stamp duty SGD$0.2 million).

Benefits of the Parkway Parade acquisition

Obviously, this paves the way for Lendlease REIT to gradually increase its stake in Parkway Parade.

Lendlease REIT’s acquisition of Jem in 2021/2022 has put Lendlease REIT back on my watchlist.

I have mentioned that FCT has always been a pillar of my REITs portfolio with its solid suburban retail segment being the main reason.

Lendlease REIT will benefit from this increased suburban exposure for its defensive and resilient traits.

For illustrative purposes only: Let’s assume that the acquisition was completed on 1 July 2021 for FY2022 and 1 July 2022 for 1H FY2023, respectively.

Lendlease REIT has provided the below figures to help us understand the effects of the acquisition.

Lendlease REIT Debt Situation + Perpetual Securities

In Lendlease REIT’s latest business update, L-REIT shared that it has:

• Obtained a €300 million unsecured 5-year sustainability-linked loan facility to refinance its Euro loan due in FY2024
• No refinancing risks till FY2025
• 89% of total borrowing is sustainable financing after drawing down on the Euro loan
• Approximately 61% of the borrowings are hedged to fixed rates

Lendlease REIT’s use of sustainable financing is interesting to see in Singapore.

For sustainability-linked loans, borrowers will have to commit to sustainability performance targets and are awarded a reduction in interest rates if their sustainability targets are met.

Also, let’s not forget the 2 tranches of perpetual securities that Lendlease REIT has issued that are not included in the calculation of the gearing ratio.

• Series 002 Perpetual Securities
  SGD$200m (5.25%) in 2022
  • First Reset Date = 11 April 2025
• Series 001 Perpetual Securities
  SGD$200m (4.20%) in 2021
  • First Reset Date = 04 June 2026

Perpetual securities are often referred to as “perps”, or perpetual bonds and perpetual notes. Perpetual securities have no maturity date, but an issuer may choose to redeem the after a specified period of time.

Never heard of perpetual securities? Learn more about it from MoneySense.

I think it would be a good idea to keep a close watch on Lendlease REIT’s debt situation (inclusive of perpetual securities) that’s hovering around 50% right now.

Lendlease REIT is currently trading at $0.665 on 6th June 2023.

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Kevin

Kevin started Turtle Investor when his net worth languished at negative $25,755. His desire to turn things around led him to build passive income from investments and side hustles that pay for all his daily expenses and overseas vacations. You can learn more about Kevin here.