CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee have maintained their “add” call and target price of 95.6 cents for Lendlease Global Commercial REIT, pointing at “encouraging” 1QFY2022 rental reversions.
In a Nov 9 report, Lock and Eing note that the occupancy rate for the REIT remained high 99.8%, which was flat compared to 2HFY2021. They note, however, 313@Somerset’s occupancy rate declined slightly from 99.2% in 2HFY21 to 98.9% in 1QFY2022, while Sky Complex remained 100% occupied.
Lock and Eing also point out that the tenant retention ratio improved from 61.5% in FY21 to 90% in 1QFY2022, as LREIT took a deliberate move to change its tenant mix at 313@Somerset last year.
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At end-FY2021, LREIT had 24% of leases by rental income expiring in FY2022 but it managed to de-risk lease expiry to 11% by rental income in 1QFY2022 alone as it renewed larger tenants ahead of time.
For 313@Somerset, it delivered positive high single-digit rental reversion in 1QFY2022, above the analysts’ expectations.
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“Aside from a stabilising operating environment, we believe that the positive rental reversion was driven by expectations of stronger shopper traffic in the future due to the impending asset enhancement initiatives (AEI) in the mall,” they say.
As for tenant sales, the analysts note that it improved by 3% q-o-q in 1QFY21 and 14% y-o-y for the first nine months of 2021.
They also understand that tenant sales have recovered to 70-80% of pre-Covid-19 levels, if online sales are taken into account.
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The REIT also expects stronger tenant sales in 2QFY2022, driven by year-end holiday and higher tourist spending as more vaccinated travel lanes are established.
“We expect LREIT to deliver an encouraging rental reversion in FY2022 given that it has renewed 50% of its leases on positive rental reversion and as operating sentiment improves.”
As for Sky Complex, more employees are understood to have returned to the building, with an increase in the number of enquiries received for season parking.
The analysts see more room for valuation improvement for this asset due to the strong leasing demand in the surrounding buildings and new developments in the vicinity.
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Separately, LREIT has completed the acquisition stake of 28.05% in JEM, taking its total stake to 31.8%. It hopes to raise its stake in JEM further in the next 6 to 12 months “with 100% being
the ideal scenario,” Lock and Eing says.
Its healthy gearing of 34.3% (as of Sep 2021) will help to support an accretive acquisition. Lock and Eing highlight that Jem is a suburban mall, and continued to deliver resilient tenant sales close to pre Covid-19 levels.
They expect LREIT’s FY2022-23 DPU growth to be underpinned by annual rental escalations in about 60% of the mall’s net lettable area (NLA), the long lease structure of Sky Complex, the redevelopment of Grange road carpark and the acquisition of an additional stake in Jem.
Some re-rating catalysts include accretive acquisitions, while downside risk could come from weaker rental reversion.
As at 3.30pm, units of Lendlease traded at 90 cents, with a price to book ratio of 1.08 and dividend yield of 5.36%.
