Analysts are remaining positive on Lendlease Global Commercial REIT (LREIT), keeping their &ldquo add&rdquo and &ldquo buy&rdquo calls after the REIT&rsquo s results for the 1HFY2023 ended Dec 31, 2022.

 

LREIT, on Feb 7, reported a distribution per unit (DPU) of 2.45 cents for the 1HFY2023, 2.1% higher y-o-y, coming in line with the analysts&rsquo expectations.

 

DBS says LREIT is a &lsquo hidden gem&rsquo

 

DBS Group Research analysts Geraldine Wong and Derek Tan are the most positive among their peers with an unchanged target price of $1.

 

Seeing the REIT &ldquo emerging as a dominant retail play&rdquo , Wong and Tan consider LREIT as a &ldquo hidden gem&rdquo with the potential to come out as a &ldquo strong contender&rdquo within the retail Singapore REIT (S-REIT) subsector.

 

&ldquo With Jem in the bag, we believe that the risk-reward profile for LREIT has turned more favourable with higher growth visibility, riding on the rebound of its key assets 313@Somerset and Jem,&rdquo they write.

 

The analysts also see LREIT&rsquo s yield difference against its peers to drive a re-rating in its unit price.

 

At its current unit price levels, LREIT is trading at a yield discount of 80 basis points (bps) to 110 bps to its peers in the large-cap retail space.

 

The analysts believe that the discount is &ldquo unwarranted&rdquo and should &ldquo compress over time&rdquo .

 

&ldquo We believe the market will start to appreciate LREIT&rsquo s enhanced value proposition to match its large-cap peers, as it has a Singapore-centric strategy with an attractive pipeline of dominant commercial assets under right of first refusal (ROFR),&rdquo they write.

 

LREIT also has an &ldquo added leg of resilience with growing suburban exposure and stable longstanding office leases&rdquo as well as visibility in terms of acquisition growth. The REIT&rsquo s reopening prospects in FY2023 to FY2024 are also factors to the upward re-rating, the analysts note. Furthermore, central rents are now &ldquo at an inflexion point&rdquo .

 

In their report dated Feb 8, Wong and Tan expect LREIT&rsquo s retail segments, 313@Somerset and Jem leading earnings growth in the FY2023.

 

The REIT&rsquo s 313@Somerset saw shopper traffic and tenant sales smashing records at 115% and 150% of their normalised levels in December. The mall&rsquo s occupancy cost, at around 15% to 18% are hovering at healthy levels and below their pre-Covid-19 levels.

 

&ldquo [This] will mean higher bargaining power on reversionary rents,&rdquo say Wong and Tan.

 

&ldquo We anticipate higher gross turnover (GTO) rental benching on record high sales, [a] moderation of passing rents to match FY2019 levels, and easing cost pressures to drive higher margins for the retail business in FY2023,&rdquo they add.

 

That said, a higher-than-expected interest rate refinancing on euro-denominated loans in FY2024, which make up around 28% of the REIT&rsquo s total borrowings, is a key risk.

 

LREIT is &lsquo operationally sound&rsquo , says CGS-CIMB

 

CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong have deemed LREIT &ldquo operationally sound&rdquo after its retail portfolio delivered positive reversion and high occupancy during the 1HFY2023.

 

That said, they note that the REIT&rsquo s credit metrices deteriorated during the half-year period, albeit with mitigating factors.

 

&ldquo [The] deployment of around 10,000 sq ft of unutilised gross floor area (GFA) at 313@Somerset, in addition to built-in rental escalations/indexations and positive reversions, should provide rental and valuation uplift, mitigating deterioration of interest coverage and gearing,&rdquo they write.

 

The analysts have lowered their DPU estimates for the FY2023 to FY2025 as they factor in the higher costs of borrowing. However, their target price remains unchanged at 88 cents, as the lower DPU forecasts are offset by lower cost of equity (COE) and beta assumptions.

 

&ldquo Demand for space at LREIT&rsquo s retail assets remains intact, while long leases at Sky Complex and Jem&rsquo s office space provide income visibility,&rdquo write Lock and Ong.

 

To this end, the analysts see stronger-than-forecast reversions, accelerated deployment of unutilised GFA at 313@somerset and accretive acquisitions as potential re-rating catalysts. At the same time, a weaker-than-expected reversion or leasing and slowdown in consumer spending, which may result in lower GTO rents and weaker tenant sentiment, may pose downside risks.

 

UOBKH sees &lsquo good results&rsquo for LREIT&rsquo s 1HFY2023

 

UOB Kay Hian analyst Jonathan Koh has also kept his target price unchanged at 87 cents as LREIT&rsquo s 1HFY2023 saw &ldquo steady growth&rdquo with a &ldquo resilient&rdquo net property income (NPI) margin.

 

To Koh, LREIT&rsquo s results for the half-year period were positive with the y-o-y DPU growth and positive rental reversion from 313@Somerset and Jem.

 

&ldquo Jem contributed for the full six months and occupancy has hit 100%. 313@Somerset benefits from the reopening of China and return of tourists to Orchard Road,&rdquo says Koh.

 

The REIT&rsquo s locked-in cost of electricity for Jem and 313@Somerset at fixed rates for the FY2023 is also a positive factor in Koh&rsquo s view. &ldquo Utilities account for 6%-8% of operating expenses, lower than comparable retail malls, due to energy saving features, including atrium daylighting to tap natural sunlight, usage of low-E double glazed glass for the facades, and installation of solar panels. Thus, NPI margin was stable at 75.1%,&rdquo he says.

 

Furthermore, LREIT&rsquo s Sky Complex in Italy stands to benefit from the high inflationary environment.

 

&ldquo Sky Complex maintained full occupancy of 100%. It is on a long-term lease to Sky Italia until 2032 and annual rental escalation is based on 75% of the changes in ISTAT consumer price index (CPI). Rental income from Sky Complex increased 4% since 1QFY23. It has long weighted average lease expiry (WALE) of 9.4 years,&rdquo Koh points out.

 

To him, LREIT will also stand to benefit from the pick-up in the retail market, the return of tourists to Singapore as well as its untapped GFA of 10,860 sq ft due to the increase in permissible plot ratio from 4.9x to 5.6x.

 

The attractive mix of anchor tenants at Jem and LREIT&rsquo s focus on expansion in Singapore are also factors in its favour, notes Koh, who has kept his DPU estimates unchanged.

 

Based on his estimates, LREIT has a distribution yield of 6.4% for the FY2023, which he deems as &ldquo attractive&rdquo .

 

Jem, the MVP, says Citi

 

Citi Research analyst Brandon Lee says LREIT&rsquo s 1HFY2023 results show that &ldquo it is all about Jem&rdquo . The REIT&rsquo s results &ldquo showcased the significance&rdquo of the mall&rsquo s acquisition, he notes.

 

Jem helped drive both tenant sales and traffic to above the REIT&rsquo s pre-Covid-19 levels, Lee notes. The mall also helped see better positive rent reversion of 2% in the 2QFY2023 and stronger NPI margin, he adds.

 

While LREIT&rsquo s operating metrices stood strong, Lee is less sure about its credit metrices.

 

&ldquo While the establishment of its maiden dividend reinvestment plan (DRP) should result in a stronger balance sheet and improved liquidity, we note LREIT is already paying 100% of 1HFY2023 base/performance fees and some property management fees in units ([around] 84% in FY2022 on our estimates),&rdquo he says.

 

&ldquo Hence, the resultant expansion in share base may not be viewed positively by investors. Adjusted interest coverage ratio (ICR) fell to 2.1x in 2QFY2023 (from 2.3x in 1QFY23), but ICR of 5.5x remains way above debt agreements&rsquo required 2.0x,&rdquo he adds. &ldquo While LREIT expects the refinancing of its EUR285 million ($405.5 million debt (due in October 2022) to result in overall debt cost increase of 60 bps &ndash 70 bps, it is relatively lower than our assumed 100 bps.&rdquo

 

At its current unit price, Lee points out that LREIT has underperformed the general S-REITs sector year-to-date (ytd). As such, he sees this as a &ldquo good entry point&rdquo into &ldquo an S-REIT with decent forward yield of 6.5%, which is [around] 70 bps &ndash 100 bps above its retail peers.

 

THE manager of Lendlease Global Commercial Reit : JYEU 0% (Lendlease Reit) posted distribution per unit (DPU) of S$0.0245 for the first half FY2023 ended December 2022, up 2.1 per cent from S$0.024 in the corresponding period a year ago.

 

Distributable income rose 95.9 per cent to S$56 million, from S$28.6 million in the previous year.

 

Gross revenue more than doubled to S$101.7 million in H1 FY2023, from S$39.2 million in H1 FY2022. The increase was mainly due to contributions from Jem, which was acquired in April 2022, as well as the easing of Covid-19 measures.

 

This was partly offset by lower revenue from the Sky Complex office asset in Milan due to a weaker euro against the Singapore dollar.

 

Net property income surged to S$76.4 million, from S$29.6 million.

 

The DPU for H1 will be paid out on Mar 30.

 

Committed occupancy rate at Lendlease Reit&rsquo s retail portfolio stood at 99.5 per cent as at Dec 31, 2022, with a positive retail rental reversion of about 2 per cent for the period.

 

Its office portfolio saw positive rental escalation of about 4 per cent, with a weighted average lease expiry (Wale) of 12.4 years by net lettable area and 15.3 years by gross rental income.

 

The real estate investment trust (Reit) manager said the long Wale ensured &ldquo a stable income stream&rdquo for unitholders.

 

&ldquo We are optimistic that Lendlease Reit&rsquo s retail assets will benefit from China&rsquo s reopening to generate higher footfall and tenants&rsquo sales for our retail properties,&rdquo said Kelvin Chow, chief executive of the Reit manager.

 

Lendlease Reit&rsquo s aggregate leverage stood at 39.2 per cent as at Dec 31, 2022, down from 39.4 per cent as at end-June.

 

Its weighted average cost of debt rose to 2.35 per cent, from 2.24 per cent previously, while interest coverage ratio fell to 5.5 times, from 6.9 times previously.