Analysts are remaining positive on Lendlease Global Commercial REIT (LREIT) JYEU , keeping their “add” and “buy” calls after the REIT’s results for the 1HFY2023 ended Dec 31, 2022.
LREIT, on Feb 7, reported a distribution per unit (DPU) of 2.45 cents for the 1HFY2023, 2.1% higher y-o-y, coming in line with the analysts’ expectations.
DBS says LREIT is a ‘hidden gem’
DBS Group Research analysts Geraldine Wong and Derek Tan are the most positive among their peers with an unchanged target price of $1.
Seeing the REIT “emerging as a dominant retail play”, Wong and Tan consider LREIT as a “hidden gem” with the potential to come out as a “strong contender” within the retail Singapore REIT (S-REIT) subsector.
“With Jem in the bag, we believe that the risk-reward profile for LREIT has turned more favourable with higher growth visibility, riding on the rebound of its key assets 313@Somerset and Jem,” they write.
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The analysts also see LREIT’s yield difference against its peers to drive a re-rating in its unit price.
At its current unit price levels, LREIT is trading at a yield discount of 80 basis points (bps) to 110 bps to its peers in the large-cap retail space.
The analysts believe that the discount is “unwarranted” and should “compress over time”.
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“We believe the market will start to appreciate LREIT’s enhanced value proposition to match its large-cap peers, as it has a Singapore-centric strategy with an attractive pipeline of dominant commercial assets under right of first refusal (ROFR),” they write.
LREIT also has an “added leg of resilience with growing suburban exposure and stable longstanding office leases” as well as visibility in terms of acquisition growth. The REIT’s reopening prospects in FY2023 to FY2024 are also factors to the upward re-rating, the analysts note. Furthermore, central rents are now “at an inflexion point”.
In their report dated Feb 8, Wong and Tan expect LREIT’s retail segments, 313@Somerset and Jem leading earnings growth in the FY2023.
The REIT’s 313@Somerset saw shopper traffic and tenant sales smashing records at 115% and 150% of their normalised levels in December. The mall’s occupancy cost, at around 15% to 18% are hovering at healthy levels and below their pre-Covid-19 levels.
“[This] will mean higher bargaining power on reversionary rents,” say Wong and Tan.
“We anticipate higher gross turnover (GTO) rental benching on record high sales, [a] moderation of passing rents to match FY2019 levels, and easing cost pressures to drive higher margins for the retail business in FY2023,” they add.
That said, a higher-than-expected interest rate refinancing on euro-denominated loans in FY2024, which make up around 28% of the REIT’s total borrowings, is a key risk.
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LREIT is ‘operationally sound’, says CGS-CIMB
CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have deemed LREIT “operationally sound” after its retail portfolio delivered positive reversion and high occupancy during the 1HFY2023.
That said, they note that the REIT’s credit metrices deteriorated during the half-year period, albeit with mitigating factors.
“[The] deployment of around 10,000 sq ft of unutilised gross floor area (GFA) at 313@Somerset, in addition to built-in rental escalations/indexations and positive reversions, should provide rental and valuation uplift, mitigating deterioration of interest coverage and gearing,” they write.
The analysts have lowered their DPU estimates for the FY2023 to FY2025 as they factor in the higher costs of borrowing. However, their target price remains unchanged at 88 cents, as the lower DPU forecasts are offset by lower cost of equity (COE) and beta assumptions.
“Demand for space at LREIT’s retail assets remains intact, while long leases at Sky Complex and Jem’s office space provide income visibility,” write Lock and Ong.
To this end, the analysts see stronger-than-forecast reversions, accelerated deployment of unutilised GFA at 313@somerset and accretive acquisitions as potential re-rating catalysts. At the same time, a weaker-than-expected reversion or leasing and slowdown in consumer spending, which may result in lower GTO rents and weaker tenant sentiment, may pose downside risks.
UOBKH sees ‘good results’ for LREIT’s 1HFY2023
UOB Kay Hian analyst Jonathan Koh has also kept his target price unchanged at 87 cents as LREIT’s 1HFY2023 saw “steady growth” with a “resilient” net property income (NPI) margin.
To Koh, LREIT’s results for the half-year period were positive with the y-o-y DPU growth and positive rental reversion from 313@Somerset and Jem.
“Jem contributed for the full six months and occupancy has hit 100%. 313@Somerset benefits from the reopening of China and return of tourists to Orchard Road,” says Koh.
The REIT’s locked-in cost of electricity for Jem and 313@Somerset at fixed rates for the FY2023 is also a positive factor in Koh’s view. “Utilities account for 6%-8% of operating expenses, lower than comparable retail malls, due to energy saving features, including atrium daylighting to tap natural sunlight, usage of low-E double glazed glass for the facades, and installation of solar panels. Thus, NPI margin was stable at 75.1%,” he says.
Furthermore, LREIT’s Sky Complex in Italy stands to benefit from the high inflationary environment.
“Sky Complex maintained full occupancy of 100%. It is on a long-term lease to Sky Italia until 2032 and annual rental escalation is based on 75% of the changes in ISTAT consumer price index (CPI). Rental income from Sky Complex increased 4% since 1QFY23. It has long weighted average lease expiry (WALE) of 9.4 years,” Koh points out.
To him, LREIT will also stand to benefit from the pick-up in the retail market, the return of tourists to Singapore as well as its untapped GFA of 10,860 sq ft due to the increase in permissible plot ratio from 4.9x to 5.6x.
The attractive mix of anchor tenants at Jem and LREIT’s focus on expansion in Singapore are also factors in its favour, notes Koh, who has kept his DPU estimates unchanged.
Based on his estimates, LREIT has a distribution yield of 6.4% for the FY2023, which he deems as “attractive”.
Jem, the MVP, says Citi
Citi Research analyst Brandon Lee says LREIT’s 1HFY2023 results show that “it is all about Jem”. The REIT’s results “showcased the significance” of the mall’s acquisition, he notes.
Jem helped drive both tenant sales and traffic to above the REIT’s pre-Covid-19 levels, Lee notes. The mall also helped see better positive rent reversion of 2% in the 2QFY2023 and stronger NPI margin, he adds.
While LREIT’s operating metrices stood strong, Lee is less sure about its credit metrices.
“While the establishment of its maiden dividend reinvestment plan (DRP) should result in a stronger balance sheet and improved liquidity, we note LREIT is already paying 100% of 1HFY2023 base/performance fees and some property management fees in units ([around] 84% in FY2022 on our estimates),” he says.
“Hence, the resultant expansion in share base may not be viewed positively by investors. Adjusted interest coverage ratio (ICR) fell to 2.1x in 2QFY2023 (from 2.3x in 1QFY23), but ICR of 5.5x remains way above debt agreements’ required 2.0x,” he adds. “While LREIT expects the refinancing of its EUR285 million ($405.5 million debt (due in October 2022) to result in overall debt cost increase of 60 bps – 70 bps, it is relatively lower than our assumed 100 bps.”
At its current unit price, Lee points out that LREIT has underperformed the general S-REITs sector year-to-date (ytd). As such, he sees this as a “good entry point” into “an S-REIT with decent forward yield of 6.5%, which is [around] 70 bps – 100 bps above its retail peers.
Lee’s target price remains at 78 cents.
Units in LREIT closed flat at 74 cents on Feb 9.
