Maybank Securities analyst Krishna Guha has initiated coverage on Lendlease Global Commercial REIT (LREIT) with a “buy” call and a target price of 80 cents.
The REIT owns several retail and office assets in the city centre as well as suburban areas in Singapore and Italy. As at March 31, the REIT’s assets under management (AUM) stood at $3.6 billion with a net lettable area (NLA) of 2.2 million sq ft.
Calling LREIT a “gem waiting to shine”, Guha highlights several positive factors about the REIT including its play on the retail rebound in Singapore and the “rejuvenation” of the micro markets where its key assets are located.
“LREIT’s two well-located Singapore malls ([which make up] 75% of [its] gross rental income or GRI) will continue to benefit from resilient domestic consumption and steady recovery in tourism. Reversions are growing and up 3.3% year-to-date (ytd) [and] 16% of rents are due for renewal in 2024,” writes Guha.
“Further, these two assets will benefit from plans to make the Orchard Road sub-precinct the destination of choice for youths and development of Jurong as the second central business district (CBD). The repurposed Grange Road car park will be operational next year and we expect DPU accretion [of around 1%],” he adds.
Furthermore, LREIT’s lease structure – including its office master leases, which comprise 25% of its GRI, provide stability and step-ups, notes the analyst.
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LREIT’s supportive sponsor, Australian-headquartered Lendlease Group, is also a plus in Guha’s book. The group has a development pipeline of A$113 billion ($101.6 billion) and A$36 billion of funds under management (FUM). Its capital partners include more than 150 global institutional investors.
“LREIT is the sponsor’s only listed REIT and it has right-of-first-refusal (ROFR) agreements for any stabilised retail/office assets. Locally, the sponsor owns 30% of Paya Lebar Quarter. Other notable projects include redevelopment of SingTel HQ and the Certis HQ,” he writes.
“While funding metrics and macro conditions are challenging, we think the 7% yield and 15% discount to book largely offset such headwinds,” he says.
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As at March 31, LREIT’s gearing is at 39.3% and an adjusted interest coverage ratio (ICR) of 2.0x.
On environmental, social and governmental (ESG) terms, Guha highlights LREIT’s “strong” ESG credentials, noting that with its young portfolio, the REIT is the first Singapore-listed REIT to achieve net-zero emission. The REIT even outperformed its peers in the GRESB rankings.
For the FY2023, Guha is forecasting the REIT’s distribution per unit (DPU) to come in at 4.68 cents and at 4.44 cents for the FY2024, down from LREIT’s FY2022 DPU of 4.85 cents. The drag in his earnings is due to higher borrowing costs.
To Guha, downside risks to his view include higher interest rates, non-renewals of master leases and dilutive transactions.
Units in LREIT closed 0.5 cent higher or 0.74% up at 68 cents on July 18.
