Analysts from CGS-CIMB Research, Citi Research, DBS Group Research, PhillipCapital and UOB Kay Hian are all positive on Lendlease Global Commercial REIT (LREIT) after the REIT released its results for the 1HFY2022 ended December.
On Feb 4, LREIT reported a distribution per unit (DPU) of 2.40 cents for the half-year period, 2.6% higher y-o-y. The DPU was largely in line with analysts’ estimates, except for DBS, which deemed the REIT’s 1HFY2022 DPU trending below its FY2022 estimate at 5.34 cents.
“This was partly contributed by soft performance at 313@Somerset and foreign exchanges losses from Sky Complex,” write DBS analysts Geraldine Wong and Derek Tan.
Improving outlook: CGS-CIMB
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have reiterated their “add” call on LREIT with an unchanged target price of 95.6 cents.
The REIT’s outlook seems to be looking up as the improving Covid-19 situation looks to bode well for 313@Somerset’s performance.
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Following the positive rental reversion and high occupancy seen in 313@Somerset during the 1HFY2022, CGS-CIMB’s Eing and Lock expect LREIT to see an overall positive rental reversion in the FY2022.
To be sure, the REIT has only 7% of leases by gross rental income (GRI) waiting to be renewed for the rest of the FY2022.
“Should the Covid-19 situation continue to improve, we expect LREIT to deliver an equally favourable rental reversion in FY2023,” write the analysts in a Feb 5 report.
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LREIT also has more inorganic potential with the redevelopment of the Grange Road carpark. LREIT will also be deploying 660 sq ft of bonus gross floor area (GFA) to prime units on the ground floor of 313@Somerset, which will help boost the mall’s income. The REIT has a remaining 10,200 sq ft of untapped GFA, which it aims to deploy post Covid-19 to maximise returns.
In addition, LREIT will be focusing on increasing its stake in Jem from the current 31.8% it holds. However, it does not rule out expanding overseas, especially in Milan, Italy, where it already has an asset, Sky Complex.
“[LREIT] remains confident that it can eventually acquire the remaining stake it does not currently own in Jem. Its healthy gearing of 33.5% will help to support acquisition plans. Interest rate hikes are less of a concern for LREIT as it has hedged over 90% of its borrowings,” write Eing and Lock.
Looking ahead, LREIT’s DPU growth for the FY2022-2023 will be underpinned by annual rental escalations in around 60% of 313@Somerset’s net lettable area (NLA). DPU growth will also be contributed by Sky Complex’s long-lease structure, the redevelopment of the Grange Road carpark as well as the acquisition of additional stakes in Jem.
Top small cap re-opening REIT: Citi
LREIT remains Citi’s “top small cap re-opening REIT” as analyst Brandon Lee deems its 1HFY2022 results as underlining the ongoing recovery in Singapore’s retail sector.
In his report on Feb 6, Lee has kept “buy” on LREIT with a target price of $1.
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To him, the REIT’s positives include its high single-digit positive rent reversion and improved portfolio occupancy.
LREIT’s shopper traffic at 313@Somerset stood at 57% of its pre-Covid-19 levels. Meanwhile, tenant sales and shopper traffic at Jem in the 1HFY2022 stood “very close” to its pre-Covid-19 levels with no rental rebates given.
That said, Lee is less upbeat on LREIT’s tenant sales, which represented 70% of its pre-Covid-19 levels, compared to the 90% seen in VivoCity and Suntec City Mall.
“While additional GFA of 660 sq ft was deployed to Puma and Ohayo Mama San at the ground floor of 313@somerset, we understand the former’s rent reversion was flat due to long lease tenure, compared to our expectations of positive reversion in view of its prime location,” he writes.
“On the bright side, the mall still has untapped GFA of [around] 10,200 sq ft for future tenants, which we expect to garner better rents as the retail sector recovers amid upcoming Live Nation at its adjacent Grange Road Car Park,” he adds.
As units in LREIT have fallen some 5% year-to-date (y-t-d), Citi’s Lee sees the current share price weakness as a “good buying opportunity” into the REIT.
Orchard rents at inflexion point: DBS
DBS analysts Wong and Tan have kept “buy” on LREIT with a lower target price of $1.02 from $1.05 previously.
The lower target price stems from the softening rental estimates at 313@Somerset.
“We have pushed back rental recovery at 313@Somerset in line with current lease expiry profile at the mall, with a 6.4% and 4.8% y-o-y increase in passing rents at the mall to normalised levels at [around] $18 in FY2024,” write the analysts in their Feb 7 report.
“Further acquisitions have not been priced in at, which could potentially see further DPU upside with additional stakes in JEM,” they add. The new target price translates to a “decent” forward FY2022 yield of 5.6% on current price levels and with a compelling 8% y-o-y growth in DPU.
However, Wong and Tan see the REIT as being “structured to weather storms”.
“313@Somerset continues to show resiliency with high tenant retention of 80% maintained. The Sky Complex lease remains rock solid with a 12-year triple net master lease expiring in 2032,” they write.
The analysts are keeping their eyes peeled for the full acquisition of JEM, which is said to be next on the books. The acquisition will bring about inorganic DPU growth potential, note the analysts.
“We believe that a golden opportunity exists for LREIT to fully acquire JEM mixed development within the coming year. A dominant mall in the West, we see positives from a pivot into the suburban retail space while its Singapore exposure will increase to 85% (vs 75%) as LREIT emerges as the upcoming Singapore-focused retail play,” write Wong and Tan.
The analysts add the REIT possesses the ability to “digest” JEM accretively with their suggested optimal capital structure of using 75% equity and 25% perpetual securities.
The structure will bring accretion of an estimated 0.9% while keeping gearing at an optimal less than 40%. The inclusion of debt will bring gearing a tad higher to 42%, and accretion may rise to around 6.0%, say the analysts.
Central passing rents also continue to be at an inflexion point along with staggered lease renewals.
“[The] bulk of lease expiries in FY2023 (42% of 313@Somerset by GRI) could be the pulling factor for a sharper normalization in rents in the coming results, which we anticipate full recovery back to above $18 psf pm by end FY2024 while maintaining current positive reversion rents close to [an estimated] +10%,” write the analysts.
Room for organic and inorganic growth: PhillipCapital
PhillipCapital analyst Natalie Ong has maintained her “accumulate” call on LREIT with a lower target price of 94 cents from 97 cents previously.
Her lower target price comes on the back of lower DPU estimates for the FY2022 to 2026 and higher cost of equity assumption of 7.72% from 7.66% previously.
In her Feb 7 report, Ong has lowered her DPU estimates for the FY2022 to 2026 by 1.4 – 1.9% on the anticipated rising cost of borrowing.
Citing LREIT’s results, Ong is positive on its higher occupancy, positive reversions and the unlocking of its GFA at 313@Somerset, as well as the REIT’s “robust” portfolio metrics.
On the other hand, Ong notes that LREIT’s revenue for the 1HFY2022 was dragged by lower GRI from negative reversions and lower gross turnover (GTO) rent from 313@Somerset.
“The negative reversions were inevitable given the tenants' market in 2020 and 2021. However, we think that the strategy to prioritise occupancy and refresh 313's tenant mix has paid off. LREIT retained and signed tenants that weathered the pandemic well or are expanding, lifting the vibrancy and positioning of 313@Somerset as a lifestyle and shopping destination,” writes Ong.
To Ong, catalysts for the re-rating of LREIT’s share price includes the impending acquisition of the remaining stake in Jem and the deployment of additional GFA at 313@Somerset.
LREIT’s current share price implies DPU yields of 5.7% for the FY2022, she says.
LREIT’s FY2023 DPU yield of 6.2% is “attractive”: UOB Kay Hian
UOB Kay Hian analyst Jonathan Koh has maintained his “buy” rating on LREIT with an unchanged target price of $1.03.
The analyst has also kept his existing DPU forecasts for the REIT.
In his Feb 7 report, Koh notes that the redevelopment of the Grange Road carpark into a multi-functional event space will provide double-digit return on investment (ROI) with average rent for an NLA of 42,000 sq ft at high single digits.
“Live Nation will organise 4-5 events per day with an audience of 2,500-3,500 persons per event, which will draw more youth to 313@Somerset. The event space is expected to be operational by early-2023,” he says.
Catalysts to LREIT’s share price, according to UOB Kay Hian’s Koh, include 50% of employees’ return to the office since Jan 1 which has resulted in an increase in shopper traffic and tenant sales at downtown malls like 313@Somerset.
The gradual reopening of Singapore’s international borders to tourists, as well as the addition of more vaccinated travel lanes (VTLs) and an increase in VTL quotas in 2022 and 2023 is yet another catalyst to the REIT’s share price, says Koh.
To him, LREIT has an “attractive” distribution yield of 6.2% for the FY2023, according to his estimates.
Units in LREIT closed 1 cent higher or 1.2% up at 84.5 cents on Feb 9, or 1.1 times FY2022 P/NAV and a distribution yield of 5.6%, according to DBS’s estimates.
