For Singapore investors, REITs are a large part of the investing landscape in the city state.
And for the past year or so, they’ve had a hard time growing their portfolios given the rising cost of debt.
However, that doesn’t mean REITs haven’t been active in terms of searching for opportunities.
Indeed, earlier this week Lendlease Global Commercial REIT (SGX: JYEU) announced that it would be acquiring a 10% share in Parkway Parade Partnership (PPP) for a headline price of S$90.5 million.
The partnership holds a 77.1% stake in Parkway Parade, an integrated shopping centre and office development in Marine Parade.
So, for investors in Lendlease Global Commercial REIT – also known as LREIT – what do they need to know about this transaction? Let’s find out.
Initial 7.71% stake also comes with pre-emptive rights
For LREIT, since PPP holds a 77.1% stake in Parkway Parade, this acquisition (based on the 10% share) means that it will have an effective 7.71% stake in Parkway Parade.
For those of us who aren’t aware, Parkway Parade is a seven-storey suburban mall that has over half a million sq feet of retail space.
It also has a 17-floor office tower. While PPP owns 77.1%, this isn’t split evenly between the two. It actually owns 27 office strata lots (4.3%) and 261 retail strata lots (72.8%).
Parkway Parade has a remaining land lease of around 55 years.
The purchase price of S$88.9 million (net of fees) is based on 10% of the net asset value (NAV) of PPP while the agreed market value of Parkway Parade is pegged at S$1.38 billion.
The key for investors, though, is that the agreement also gives LREIT pre-emptive rights to acquire the remaining 90% in PPP.
Similar to LREIT’s eventual full acquisition of Jem, the initial stake in PPP should allow the REIT to progressively acquire more exposure to Parkway Parade.
Slightly accretive to DPU, expands suburban retail exposure
The deal is expected to be accretive to LREIT’s distribution per unit (DPU) on a pro-forma basis to the tune of 0.82%.
While that’s not too impressive, perhaps investors may see the increased suburban retail exposure as a positive that outweighs that.
That’s because suburban retail has generally been a more resilient sector in Singapore during uncertain economic times.
One thing to note, though, is that management said that LREIT’s gearing – based on pro forma effects of the acquisition as of 31 December 2022 – would be 40.4%.
That’s a rise from the gearing ratio of 39.3% as of the end of March 2023.
Besides these details, management also stated that the opening of the Marine Parade MRT station would help with footfall to the mall.
Additionally, the REIT plans asset enhancement initiatives (AEIs) which include a planned linkway that will connect the MRT station to Parkway Parade and improved F&B offerings as well as retail options.
Positive acquisition for LREIT
Overall, the announcement was a positive one for Lendlease Global Commercial REIT as it looks to expand its portfolio beyond just Jem, 313@Somerset and its Sky Complex offices in Milan.
While the DPU accretion on a pro forma basis is rather disappointing, it’s an initial stake that should help the REIT gain a foothold with exposure to Parkway Parade.
By having pre-emptive rights to acquire the remaining 70% or so of Parkway Parade – via PPP – LREIT should be able to progressively raise its stake when it sees fit.
Finally, with increased exposure to suburban retail and the opening of an MRT station near Parkway Parade, there’s no doubt that this acquisition will strengthen LREIT’s portfolio over the long term.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
