CGS-CIMB Research has initiated coverage on Lendlease Global Commercial REIT (LREIT) with a “buy” recommendation and a target price of 85.4 cents.
Analysts Eing Kar Mei and Darren Ong say they expect footfall for the REIT to “gradually recover” after factoring in the potential impact of Covid-19 in its FY20 results.
“We believe LREIT is a domestic recovery proxy for Covid-19 with upside from acquisitions and asset enhancement initiatives (AEIs),” they say, adding that they see limited downside risks to their estimated dividend yield of 6.6% with the REIT’s 100% committed dividend payout in FY21F.
“Our base case assumes -7% rental reversion and 95% occupancy rate for FY21F for 313 but if traffic recovers faster than expected, our FY21F distribution per unit (DPU) would rise 4% in a bull case scenario (based on -2% reversion and 99% occupancy rate),” they add.
Both of LREIT’s assets, 313@Somerset in Singapore, and Sky Complex in Milan, Italy, are leased at “attractive rental rates” compared to the standard market rates.
“This, coupled with the long lease structure of Sky Complex (leased to Sky Italia (unlisted), subsidiary of Comcast Corp (CMCSA US, NR), world's largest broadcasting company) until 2032F with break lease option in 2026, and (ii) rental escalation from some 91% of its net lettable asset (NLA), provide strong support to its income,” they believe.
In Singapore, Eing and Yeo expects LREIT’s 313@Somerset to do better than its peers along the Orchard shopping belt due to its lower rental rate, its strategic location and lower reliance on tourist shoppers.
“313 has significantly lower income contribution from the more vulnerable fashion-related sectors, at around 40% of 313's FY20 income ended June vs. 60% of the retail income of other listed malls in Orchard Road,” they say.
As at end June, the mall’s occupancy rate remained high at 97.8%. LREIT has about 25% of leases by gross rental income (GRI) to be renewed in FY21F. According to Eing and Yeo, the REIT has already begun negotiating with tenants.
“Footfall in June-July 2020 has recovered to 60% of last year’s level while tenant sales saw stronger recovery at 70% of pre-Covid-19 levels,” they add.
LREIT also trades at an attractive valuation of 0.77x FY20 price-to-book value compared to the sector average of 0.93x P/BV. Pre-Covid-19, the REIT peaked at 1.1x FY20 P/BV, which prices in the estimated 20% valuation decline for 313@Somerset, assuming that there is no change in the valuation of Sky Complex.
While LREIT’s P/BV gap widened from 9-16% in January to 17-37% on September 9 compared to its peers, likely due to its higher asset concentration risk, Eing and Ong believe that the recovery of 313’s rental income and potential acquisitions would narrow the gap.
On June 13, LREIT won the bid to redevelop the Grange Road carpark behind 313@Somerset into a multi-functional event space. The space is due to be completed by the second quarter of 2022, which led Eing and Yeo to raise LREIT’s DPU for FY23F by about 10%.
“LREIT’s sponsor Lendlease Corp has granted it the right of first refusal (ROFR) for its assets. We believe Jem mall in Singapore could be the next target. There are also opportunities to unlock the unutilised 10,850 sq ft gross floor area (GFA) in 313,” say Eing and Yeo.
As at end June, LREIT’s gearing remains healthy at 35%, with strong interest coverage at 9x vs. peers’ 4-6x, providing it inorganic growth flexibility.
As at 4.29pm, units in LREIT are trading 0.5 cent higher, or 0.8% up at 66 cents, or 0.79 times FY21 book with a dividend yield of 6.57%.
