Citi Research analyst Brandon Lee has downgraded Lendlease Global Commercial REIT JYEU to “neutral” from “buy” previously due to rising capital management concerns.
LREIT’s gearing for the 4QFY2023 ended June 30 stood at 40.6%, which is its highest level since it listed on October 2019.
“We estimate a higher look-through (including $0.4 billion [in] perpetual securities (perps) and debt at Parkway Parade Partnership’s level) gearing of 50.5%, which ranks highest among S-REITs under our coverage (average 40.1%),” Lee writes.
“While we do not see near-term risk of Singapore retail cap rate expansion, we understand investors typically remain wary of higher-geared Singapore REITs (S-REITs) in a rising interest rate climate,” he adds. “LREIT’s adjusted interest coverage ratio (ICR) of 2.0x is also lowest among our covered S-REITs, with FY2024 slightly lower at 1.8x.”
LREIT’s valuations after pricing in a potential equity fund raising (EFR) is also of concern to Lee.
“We estimate LREIT’s implied cap rate of [around] 5.8% is higher than portfolio cap rate of [around] 4.5% despite resilient SG retail (76% of LREIT’s assets under management or AUM) cap rates, while current P/B of 0.75x is much lower than pre-Covid/long-term mean of 1.12/0.90x,” he says.
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“Therefore, we think the market could be pricing in some form of equity fund raising (EFR) due to its high gearing,” he adds.
Based on his estimates, Lee is looking at an equity requirement of around $0.5 billion to $0.6 billion to attain the investors’ desired look-through gearing of 35% to 38%. The issuance price is at a similar 9% to the EFR conducted in March 2022. The move will result in a pro-forma net asset value (NAV) per share of 71 cents to 72 cents compared to its current share price of 79 cents as at his report dated Aug 27. This will also imply a P/B of 0.82x to 0.84x, which is closer to LREIT’s long-term mean.
“Although we reckon any potential sale of its sole non-domestic asset, Sky Complex, could improve headline/look-through gearing to 33.1%/44.5% (vs. 40.6%/50.5% now), the transactions market in Europe is challenging (especially office) on high interest rates (+175 basis points year-to-date or ytd).
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To this end, Lee has lowered his distribution per unit (DPU) estimates for FY2024 and FY2025 by 7.0% and 3.5% to 4.31 cents and 4.55 cents respectively due to the higher debt cost and delay in multifunctional space completion. His estimates are, however, mitigated by the acquisition of Parkway Parade.
Lee’s target price is also lowered to 61 cents from 78 cents on a higher discount rate which is attributed to higher gearing and benign DPU growth, as well as a portfolio cap rate (thanks to Sky Complex’s higher cap rate).
That said, the analyst isn’t all negative on the REIT, recognising that its pre-Covid recovery is “on track”.
He adds that revenue from LREIT’s three Singaporean malls, which remain 5% to 10% below its pre-Covid numbers (according to his estimates), suggests there is still room for rental upside.
“Notably, [a] continued improvement in tourist arrivals (7M2023 at 69% of pre-Covid) and expenditures (1Q2023 at 76% of pre-Covid) should boost contributions from 313@somerset (24% of net property income or NPI),” says Lee.
As at his report dated Aug 27, LREIT’s share price has dropped by 16% ytd, underperforming the larger S-REIT sector at large, which fell by a mere 5%. The REIT now trades at an FY2024/FY2025 yield of 7.3%/7.7% respectively.
As at 4.48pm, units in LREIT are trading 0.5 cents lower or 0.85% down at 58.5 cents.
