PhillipCapital is initiating its “accumulate” recommendation on Lendlease Global Commercial REIT (LREIT) with a target price of 78 cents.
The REIT’s portfolio comprises a leasehold interest in 313@Somerset (313), a retail mall in the heart of Singapore, and a freehold interest in Sky Complex (SC), a Grade A office asset in Milan. Its portfolio has an appraised value of $1.4 billion.
In Oct this year, LREIT acquired an effective 3.75% stake in Jem for $45 million, a shopping mall in Jurong.
In a Dec 14 report, analyst Tan Jie Hui believes that the REIT’s highly stable portfolio is built for growth. She says, “We see income stability from SC, which has been 100% leased by Sky Italia for the next 12 years [FY2020 gross rental income (GRI): 34%]. The remaining 66% of its GRI stems from 313 (WALE of 1.8 years by GRI). Fixed rents historically account for more than 95% of LREIT’s gross revenue. With recovering tenant sales and returning footfalls, we expect fixed rents to continue contributing more than 90% to LREIT’s portfolio GRI in FY2022.”
And as Singapore moves towards Phase 3 of reopening the economy, the group size for gatherings and capacity limits is expected to increase. This is when Tan believes that 313 is likely to bottom out.
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“Higher-risk activities like bars and karaokes will also be allowed. With this, we expect more get-togethers and higher consumption spending. As F&B tenants contribute 37.7% to 313’s GRI, we believe that a further relaxation of Covid-19 measures will generate more footfall and sales back to 80% and 85% of pre-Covid levels respectively, from 60% and 70% currently,” says Tan.
Besides natural rent growth through rent escalations, LREIT is redeveloping the Grange Road carpark and working on AEI to increase 313’s plot ratio. While major AEI work has been temporarily delayed, the Grange Road redevelopment is set to be operational by 1H2022.
Additionally, LREIT has a ROFR which covers any proposed offer or interest in stabilised retail and office assets, should Lendlease Group be looking to divest. “We are estimating a pipeline of up to A$32.4 billion. LREIT will benefit from being the only REIT vehicle for Lendlease Group,” adds Tan.
Tan also sees the stock’s valuation as attractive compared to peers.
SEE: Lendlease Global Commercial REIT to be included under CPF's Investment Scheme
As at 11.55am, units in LREIT are trading at 74 cents, or 0.86 times book value, which is slightly below diversified retail REITs’ 0.9 times. It has a FY2021 dividend yield of 6.1%, which outperforms the average forward yields of diversified retail REITs’ 5.2%.
