SINGAPORE (Dec 6): With only two assets under its belt, LendLease Global Commercial REIT (LLGCR) might not appear to be an attractive prospect for investors. But some analysts are keeping a close eye on the recently listed retail REIT.
Describing LLGCR as a “gem in the making”, DBS Group Research is initiating coverage on the REIT with a “buy” recommendation and a target price of $1.05.
Launched by Australia-listed developer Lendlease Group, the REIT’s portfolio currently comprises the 313 @ Somerset mall in Singapore and Sky Complex, a Grade A office development in Milan, Italy.
The way lead analyst Derek Tan sees it, Lendlease Global REIT’s portfolio, while only comprising two properties for now, offers “a good mix of resilience, growth and visibility”.
“Lendlease Global Commercial REIT offers an opportunity to invest in a diversified portfolio of stabilised income-producing real estate assets that cater primarily to retail and/or office purposes,” Tan says in a Dec 5 report.
“Since 2016, the portfolio has enjoyed high occupancy rates of more than 99% and rising to 99.9% as at June 2019,” he notes. “While Sky Complex has enjoyed 100% occupancy over the past few years by virtue of it being a single-tenant lease, we are encouraged by the improvement shown by 313 @ Somerset in the past few years.”
The analyst points out that occupancy rates at 313 @ Somerset have risen steadily from a low of 96.1% in 2017 to hit 99.6% as at June 2019. “This improvement was mainly from the ongoing tenant curation that the manager has undertaken in order to keep the mall’s offering fresh to consumers,” Tan explains.
According to Tan, some 92.8% of LLGCR’s of leases by gross rental income (GRI) have inbuilt rental escalations. And going forward, he believes there are more good things to come for the two properties.
“313 @ Somerset is located at Orchard Road, which is poised to benefit from its repositioning as a vibrant lifestyle destination, while Sky Complex is located along Santa Giulia, which is being transformed into an innovative business and residential district,” Tan says.
Backed by its strong sponsor Lendlease Group, LLGCR also has a pipeline of accretive acquisition opportunities available to it in the future.
“The Lendlease Group has A$32.5 billion ($30.2 billion) worth of assets under management globally,” Tan says. “While the manager has identified Paya Lebar Quarter (PLQ) as a target, we see JEM or Parkway Parade as potential targets as well.”
With gearing currently standing at close to 35%, the analyst says LLCGR has enough debt headroom to take on opportunistic acquisitions.
“LLCGR offers investors a visible earnings stream backed by a long weighted average lease expiry (WALE) of 4.9 years by gross rental income (GRI) and 10.4 years by net lettable area (NLA),” Tan says, adding that its forward yield of 5.6% is “attractive” against retail peers that are trading at yields below 5%.
To be sure, DBS is not the only brokerage that is bullish on Lendlease Global REIT’s prospects.
Daiwa Capital Markets in October initiated coverage on Lendlease Global REIT with an “outperform” rating and a target price of $1.01.
Units in LendLease Global Commercial REIT closed 1.1% up at 93 cents on Friday.
According to DBS valuations, this implies an estimated price-to-earnings (P/E) ratio of 23.9 times, a price-to-net tangible asset (P/NTA) of 1.1 times, and a distribution yield of 5.7% for FY2020F.
