CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee believe an acquisition may be on the cards for Lendlease Global Commercial REIT (LREIT) after the REIT issued its inaugural perpetual securities of $200 million.
The analysts note that the perpetual securities were priced at 4.2% and attracted strong demand, enabling the REIT to upsize the transaction from $150 million to $200 million at a tightened price from its initial guidance of 4.35%.
“The issuance of perp does not come as a total surprise given the relatively higher cost of equity of LREIT, which makes accretive acquisitions harder,” they highlight in a June 1 research note.
SEE: Lendlease Global Commercial REIT appoints former Keppel REIT CEO as new chairman
Eing and Lock believe LREIT will mainly use the proceeds from the issuance to fund acquisitions to prevent distribution per unit (DPU) dilution, taking into account that the REIT has no refinancing needs until FY2023 ending June.
They note that part of the issuance proceeds could be used to acquire an additional stake in the Lendlease Asian Retail Investment Fund (LARIF), of which the REIT currently holds a 5% stake. LARIF holds a 75% stake in Jem.
To that end, they view that LREIT could potentially be looking at acquisitions amounting to between $200-300 million, while gearing will likely be maintained below 40% to maintain flexibility for future acquisitions. “With the combination of debt and perp, we believe LREIT could deliver accretive acquisition(s),” they say.
Eing and Lock also believe the recent tightening in Covid-19 measures following the heightened alert in Singapore will not cause a substantial impact on LREIT, given that it only has 6% of portfolio leases by gross rental income expiring by FY2021 and 20% by FY2022.
For more stories about where the money flows, click here for our Capital section
They believe annual rent escalations from around 60% of 313 Somerset’s net leaseable area and operation commencement of the Grange Road Carpark event space in 2022 should help to offset any potentially slower recovery of 313 from Covid-19 impact, including any rental rebates given in FY2021.
The analysts have kept their ‘add’ call on LREIT with a higher target price of 86.9 cents from 85.8 cents previously following a rollover in valuation to FY2022. “Our new target price implies a P/BV of 1.04 times (vs. pre-Covid January 2020 valuation of 1.1 times) and dividend yield of 5.4%,” they note.
We like LREIT for its overall more resilient income and attractive valuation (below book),” they add.
As at 10.34am, units in LREIT are trading flat at 76.5 cents.
