Maybank Securities analyst Krishna Guha has initiated coverage on Lendlease Global Commercial REIT (LREIT) with a &ldquo buy&rdquo 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&rsquo 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 &ldquo gem waiting to shine&rdquo , Guha highlights several positive factors about the REIT including its play on the retail rebound in Singapore and the &ldquo rejuvenation&rdquo of the micro markets where its key assets are located.

 

&ldquo LREIT&rsquo 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,&rdquo writes Guha.

 

&ldquo 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%],&rdquo he adds.

 

Furthermore, LREIT&rsquo s lease structure &ndash including its office master leases, which comprise 25% of its GRI, provide stability and step-ups, notes the analyst.

 

LREIT&rsquo s supportive sponsor, Australian-headquartered Lendlease Group, is also a plus in Guha&rsquo 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.

 

&ldquo LREIT is the sponsor&rsquo 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,&rdquo he writes.

 

&ldquo While funding metrics and macro conditions are challenging, we think the 7% yield and 15% discount to book largely offset such headwinds,&rdquo he says.

 

As at March 31, LREIT&rsquo 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&rsquo s &ldquo strong&rdquo 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&rsquo s distribution per unit (DPU) to come in at 4.68 cents and at 4.44 cents for the FY2024, down from LREIT&rsquo 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.

 

Lendlease Global Commercial REIT JYEU -0.75% has acquired a 10.0% stake in Parkway Parade Partnership (PPP) at a purchase consideration of around $88.9 million.

 

PPP indirectly holds 77.09% of the share value in Parkway Parade, an integrated office and retail asset located in Marine Parade.

 

The purchase consideration is based on PPP&rsquo s net asset value (NAV), which takes into account the agreed market value of Parkway Parade, which is around $1.38 billion.

 

The agreed market value was negotiated on a willing-buyer and willing-seller basis with reference to the independent valuations by Savills and Jones Lang LaSalle (JLL). It is equivalent to JLL&rsquo s valuation, which is the higher of the two as at April 30.

 

Including fees, the acquisition will cost the REIT some $90.5 million.

 

The acquisition is expected to be accretive to LREIT&rsquo s distribution per unit (DPU) on a pro forma basis. If the acquisition was completed on July 1, 2021 for the FY2022 ended June, the REIT&rsquo s DPU would have improved to 4.89 cents, up from 4.85 cents. If the acquisition was completed on July 1, 2022, LREIT&rsquo s DPU for the 1HFY2023 ended March would have improved to 2.47 cents, up from 2.45 cents.

 

The REIT&rsquo s gearing as at Dec 31, 2022, on a pro forma basis, would be at 40.4%.

 

The acquisition was financed through internal resources and debt facilities.

 

&ldquo Parkway Parade is a strategic fit with our existing portfolio as we continue to drive sustainable returns for LREIT' s unitholders. With the seamless connection from the upcoming Marine Parade MRT station and Marine Parade Central, the integrated asset is expected to improve LREIT' s earnings and distributions moving forward,&rdquo says Kelvin Chow, CEO of the manager.

 

The REIT says an asset enhancement initiative (AEI) has been planned for Parkway Parade to coincide with the completion of the new MRT station. Upon its completion, the mall will have a proposed link to the new MRT station via the basement. The mall will also see new retail and food and beverage (F& B) tenants following the AEI.

LEASE Global Commercial Reit (Lendlease Global Reit) on Tuesday (May 9) reported a committed portfolio occupancy of 99.8 per cent for the third quarter (Q3) ended Mar 31, 2023, unchanged from the previous quarter. 

 

In a Q3 business update, the real estate investment trust (Reit)&lsquo s manager said its portfolio&rsquo s weighted average lease expiry (Wale) for the period stood at 8.3 years by net lettable area (NLA) and 5.4 years by gross rental income (GRI).

 

As at Mar 31, 2023, the Reit&rsquo s retail portfolio occupancy stood at 99.5 per cent, with positive year-to-date retail rental reversion of 3.3 per cent.

 

It further noted that in Q3 2023 tenant sales were up 4.6 times, driven by the acquisition of Jem in April 2022, while visitation increased 2.7 times year on year.

 

It added that Singapore retail sales, excluding motor vehicles, rose 11.7 per cent in February 2023 on the back of rising demand for food and alcohol, apparel and footwear.

 

Despite ongoing costs and operational challenges, retailers remain optimistic about tourism recovery and consumer spending, said the manager.

 

As at end-March, tenant retention rate stood at 79.5 per cent for the Reit&rsquo s retail portfolio, based on year-to-date completed lease renewal by NLA.

 

Lendlease Global Reit&rsquo s Grade-A office in Milan, Sky Complex, remains 100 per cent leased to Sky Italia, a subsidiary of Comcast Corp.

 

The manager noted that Sky Complex&rsquo s positive office rental escalation of about 4 per cent, and long office Wale of 12.2 years by NLA and 15 years by GRI, will continue to provide a stable income stream for the Reit&rsquo s unitholders.

 

Kelvin Chow, chief executive of the manager, said: &ldquo Our assets continued to perform well, underpinned by a high portfolio occupancy with a long Wale of 5.4 years by GRI, which will ensure long-term cash flow stability.&rdquo

 

&ldquo With refinancing out of the way, we plan to focus on organic growth through proactive asset management and managing our leases,&rdquo he added.

 

CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept their &ldquo add&rdquo call on Lendlease Global Commercial REIT (LREIT) JYEU 0.74% with a higher target price of 90 cents from 88 cents previously as they see both organic and inorganic growth possibilities for the REIT.

 

In their March 29 report, the analysts estimate that the REIT&rsquo s portfolio valuation could increase by 4.1% y-o-y to $3.7 billion. This is based on increases in the valuations of 313@Somerset, Jem and Sky Complex by 2.1%, 4.4% and 0.2% respectively.

 

The uplifts can come from rental escalation and indexation, positive reversions and the deployment of the 10,200 sq ft of unutilised gross floor area (GFA) at 313@Somerset, note the analysts.

 

Without the fair valuation gains, the analysts&rsquo FY2024 gearing of 40.2% for the REIT translates into a debt headroom of $115.8 million, assuming an internal gearing limit of 42%. However, once the increments are factored in, the analysts&rsquo gearing estimate would be lowered to 38.8% from 40.2% for the FY2024. The increase in the REIT&rsquo s properties&rsquo valuations would also increase its debt headroom by 92.5%, from $115.8 million to $222.9 million, based on a 42% gearing limit.

 

The analysts also see the possibility of the REIT acquiring a 12% stake in Paya Lebar Quarter (PLQ) or 40% of its sponsor&rsquo s 30% stake in PLQ. This is after the increase in its asset valuation, which should lower its gearing and increase its debt headroom, the analysts note.

 

The REIT may also be able to acquire its sponsor&rsquo s entire 6.1% stake in Parkway Parade, or up to 32% of the entire asset if the other shareholders are willing to divest their stakes, the analysts add.

 

Further to their report, the analysts have upped their distribution per unit (DPU) estimates by 0.3%, 0.3% and 2.9% for the FY2023, FY2024 and FY2025 respectively as they foresee higher earnings from the REIT and lower cost of equity (COE) of 7.5% from 7.9% previously.

 

Despite its organic growth potential, the analysts note that LREIT&rsquo s unit price has underperformed the Singapore REITs index (FSTREI), falling by 18.1% since March 2022 compared to the index&rsquo s 12.9% decline during the same period. According to them, the underperformance is attributed to its adjusted interest coverage ratio (ICR) falling below 2.5x, which caps its gearing at 45% compared to the 50% for Singapore REITs (S-REITs) with adjusted ICRs above 2.5x.

 

In their view, the lower gearing limit translates into a smaller debt headroom and hampers inorganic growth.

 

At present, the analysts don&rsquo t expect the REIT&rsquo s adjusted interest coverage ratio (ICR) to cross the 2.5x mark in the next few years due to the higher cost of debt and perpetual securities secured in this elevated interest rate environment.

 

&ldquo In the meantime, LREIT is trading at [an] attractive 6.6%/6.9% FY2023/FY2024 DPU yields [or] 2.5 standard deviation (s.d.) of [its] historical yield,&rdquo the analysts write.

 

To them, stronger-than-forecasted reversions and accretive acquisitions are re-rating catalysts while weaker-than-expected reversions or leasing rates and a slowdown in consumer spending, which may result in lower gross turnover rents and weaker tenant sentiment, are downside risks.