Can LHN Limited (SGX:41O) Keep Its ROE High as the World Heats Up?

Investors are buzzing about LHN Limited (SGX:41O) for its impressive returns, but here's the rub: Can this Singapore-based real estate giant sustain its stellar performance as competition and interest rates rise? Let's dive into the numbers and strategies to find out.

The ROE Machine—But for How Long?

LHN's ROE has been a star performer, hitting an annualized 28.63% in Q3 2024 and averaging 20.39% over the past year—blowing away the industry median of 2.85%. This is no fluke. The company's DuPont analysis reveals three key drivers:
1. Sky-high net margins (51.62%), thanks to cost discipline in its co-living segment.
2. A razor-thin asset turnover (0.2057), suggesting it's efficiently deploying assets.
3. A leverage-heavy equity multiplier (2.69), which amplifies returns but also magnifies risk.

But here's the catch: Analysts project LHN's ROE to drop to 14.05% by 2028. Why? Core earnings are weakening. Excluding one-time gains like the S$25.8 million Emerald Properties sale, LHN's interim EPS fell 19% YoY in 2024 to S$0.032. This is a red flag—non-recurring items are propping up results, not organic growth.

The Debt Dragon—Is It a Threat or an Opportunity?

LHN's debt-to-equity ratio of 1.03 is a double-edged sword. On one hand, leverage has supercharged returns. On the other, rising interest rates could turn this into a liability. GuruFocus has flagged five severe warnings, including liquidity strains and high debt levels.

Yet, there's a silver lining: The proposed spin-off of Coliwoo (its co-living brand) could slash debt. If Coliwoo's IPO succeeds, LHN could use the proceeds to pare down net debt, lowering interest expenses. This move could also unlock value for shareholders by focusing on its fastest-growing asset—Coliwoo, which expanded its keys by 20% YoY in 2025.

Strategic Plays to Outrun the Crowd

LHN isn't just sitting on its laurels. Here's how it's fighting back:

1. Co-Living Dominance:
2. Coliwoo's strategic leases to Singapore's Ministry of Health (MOHH) and plans to add 3,000+ keys by Q2 2025 position it as a leader in a booming niche.

3. The spin-off aims to unlock international growth, reducing reliance on Singapore's saturated market.

4. Asset-Light Model:

5. Shifting away from capital-heavy real estate development, LHN is prioritizing management fees and recurring revenue streams. This reduces capital needs and aligns with its debt-reduction goals.

6. Playing the ESG Card:

7. LHN is digitizing operations and investing in ESG initiatives, like renewable energy adoption. This not only cuts costs but also attracts ESG-focused investors, who are increasingly driving capital flows.

Interest Rate Risks—Can They Be Mitigated?

With the Fed signaling further rate cuts (50 bps in 2025), LHN could refinance high-interest debt at cheaper rates. But here's the catch: 75% of its debt is fixed-rate, so it won't immediately benefit from lower rates. However, the asset-light model reduces exposure to volatile real estate valuations, while data centers and Class A assets—targeted growth areas—are less sensitive to rate fluctuations.

The Bottom Line: Buy, Sell, or Hold?

LHN's P/E of 4.07 looks cheap, but it's a trap. The low valuation ignores non-recurring gains, which have inflated earnings. Core profitability is slipping, and the spin-off's success hinges on Coliwoo's global expansion—a big “if.”

The Bull Case: If Coliwoo's IPO delivers, LHN could deleverage, stabilize ROE, and ride the co-living wave. Analyst Paul Chew's S$0.61 price target (up 23% from current levels) isn't unreasonable.

The Bear Case: Debt remains a ticking clock. If rates rise again or Coliwoo fails to grow beyond Singapore, LHN's ROE could crater faster than expected.

Final Take

LHN has the tools to stay ahead—Coliwoo's growth, strategic pivots to an asset-light model, and opportunistic debt refinancing—but execution is key. For now, it's a hold for patient investors willing to bet on its turnaround. But tread carefully: The path to sustaining ROE is narrow, and one misstep could send this high-flyer spiraling.