SINGAPORE (Oct 15): Daiwa Capital Markets is initiating coverage on Lendlease Global Commercial REIT with an “outperform” rating and a target price of $1.01.
According to analyst David Lum, the REIT’s 12-month forward distribution per unit (DPU) yield of 5.6% is higher than the sector average of 5.1% among Singapore REITs – making it an attractive and viable investment option.
“With most commercial and retail S-REITs looking fully valued or overvalued, [Lendlease Global REIT] is our top pick in the S-REIT sector for its undemanding valuation and solid long-term deal pipeline,” says Lum.
Launched by Australia-listed developer Lendlease Group, the REIT’s initial public offering (IPO) was launched on Sept 25 with 387.5 million units at an offer price of 88 cents each. This comprised an international placement of 364.7 million units and a public tranche of 22.7 million units.
See: Lendlease eyes Singapore REIT listing at 88 cents a unit; aims to raise $1 bil in total
The public tranche was subscribed 14.5 times, making it the highest subscription rate for a Singapore REIT in five years. It began trading a week later on Oct 2 at 93.5 cents - 6.3% higher than its IPO price.
Its property portfolio amounting to $1.4 billion comprises Singapore’s youth-centric shopping mall 313 @ Somerset on Orchard Road, and Sky Complex, a Grade A office in Milan, Italy.
See: Lendlease Global Commercial REIT public tranche 14.5 times subscribed – highest for S-REIT in 5 years
Lum notes that 313 @ Somerset is slightly overvalued relative to the 4.25–4.5% cap-rate assumed by valuers. This could possibly be because the property will have “limited downside earnings risks” as it nears the end of its property cycle, he says.
Still, Lum expects the mall to see a “gradual multi-year rental recovery”, as rental reversions gain traction from 2022.
As for the Sky Complex in Milan, Lum says the property looks “severely under-rented”.
The analyst muses that the 265 million euro ($400 million) property is “undervalued” given its quality, long lease of 12.9 years and its 75% inflation-indexed nature.
“[These] could partially offset rising borrowing-cost risk in the longer term,” Lum says.
To that end, Lum cautions that Lendlease Global REIT, which has “one of the largest and most visible acquisition pipelines in the S-REIT sector”, would “face the greatest risk from deteriorating market conditions”.
This would, in turn, limit its ability to make accretive acquisitions, he adds.
Even so, Lum notes that both 313 @ Somerset and Sky Complex are “unique assets” that are part of the company’s bigger pipeline of projects in Singapore.
These projects include the “two newly built, best-in-class mixed developments” of Jurong East Mall (JEM) and Paya Lebar Quarter (PLQ). Lendlease has a 20.1% stake in JEM and a 30% stake in PLQ.
Overall, Lum is looking at the two properties having below sector-average DPU growth from Sky Complex’s low-growth income and 313 @ Somerset’s low-single-digit rental reversions.
Still, he expects the REIT to be “highly stable, with limited downside risk” over the next three years.
As at 3.20pm on Tuesday, units in Lendlease Global REIT are trading flat at 94 cents.
