The recent sell-down in the units of Lendlease Global Commercial REIT (LREIT) JYEU 1.83% has been &ldquo unwarranted&rdquo , write DBS Group Research analysts Geraldine Wong and Derek Tan.

 

LREIT&rsquo s unit price has been falling steadily after the REIT&rsquo s released its results for the FY2023 ended June on Aug 7. Since then, units in the REIT have fallen by around 17.91% to 54.5 cents as at the close of Sept 12.

 

However, Wong and Tan are remaining upbeat about the REIT&rsquo s prospects. In their Sept 11 report, the analysts have kept their &ldquo buy&rdquo call and target price of 90 cents, which represents an upside of 65% to the REIT&rsquo s last-closed price of 54.5 cents.

 

&ldquo LREIT has underperformed its retail focused Singapore REIT (S-REIT) peers lately, with its share price weakening by close to 15% while its peers have declined only around 3%,&rdquo the analysts write. &ldquo This is despite the REIT building more resilience and growth via its acquisitions of JEM mall (in February 2022) and a 10% stake in Parkway Parade Mall in June 2023.&rdquo

 

&ldquo With these strategic acquisitions, LREIT&rsquo s earnings are more diversified and defensive in our view and the pivot to Singapore is a strong strategic move,&rdquo they add.

 

Following the REIT&rsquo s strategic pivot to Singapore, the REIT&rsquo s assets within the country now make up 88% of its total assets, mainly from the retail space. &ldquo We expect the REIT to deliver stable returns in the coming years,&rdquo write the analysts.

 

At present, the REIT is now trading at an FY2024 yield of 8.2%, which is an opportunity &ldquo not to be missed&rdquo .

 

The REIT, which is also trading at a P/B of around 0.7x and -1 standard deviation (s.d.) of its historical mean means it is providing &ldquo attractive returns for an emerging suburban landlord&rdquo . However, this may imply expectations of a &ldquo significant cut&rdquo in its distribution per unit (DPUs), add the analysts.

 

That said, they remain optimistic about the REIT&rsquo s future performance, seeing its ebitda to grow at a compound annual growth rate (CAGR) of 7% in FY2023 to FY2025. This is due to the further rental reversion upside for the REIT&rsquo s key assets, 313@Somerset and JEM.

 

&ldquo We expect these properties to see positive rental reversions of 5% - 15% in coming years, underpinned by strong tenant sales exceeding pre-Covid levels by 15%,&rdquo write Wong and Tan.

 

&ldquo In addition, LREIT will see a boost from [the] acquisition of a 10% stake in Parkway Parade, and rental escalations from Sky Complex [in Milan],&rdquo they add.

 

At this price, the analysts see that an equity fund raising is unlikely to happen, given the REIT&rsquo s &ldquo stable financial metrics and strong lender support&rdquo . This also implies that the pressure to reduce its gearing is lower than the market&rsquo s perception.

 

Instead, the analysts envision the REIT conducting an asset sale or JEM Tower or Sky Complex, Milan, which could reduce the REIT&rsquo s gearing to 32% with minimal dilution to its DPU.

 

Overall, the analysts reiterate that the recent sell-off is unmerited. &ldquo We see significant value emerging, with concerns over LREIT&rsquo s balance sheet overblown,&rdquo they write.

 

CITI Research downgraded its call on Lendlease Global Commercial Real Estate Investment Trust (Lendlease Global Reit : JYEU -0.85%) to &ldquo neutral&rdquo from &ldquo buy&rdquo in view of rising capital management concerns and valuations pricing in a potential equity fundraising.

 

After shaving its distribution per unit (DPU) estimates for FY2024 to FY2025 to account for higher debt costs and delays in completion of the Reit&rsquo s multifunctional space, the research house now has a lower price target of S$0.61 compared to S$0.78 previously.

 

The new target also implies a higher discount rate resulting from higher gearing and benign DPU growth, along with an increased portfolio cap rate, said analyst Brandon Lee on Sunday (Aug 27).

 

He highlighted that the Reit&rsquo s implied capitalisation rate of about 5.8 per cent stands higher than its portfolio&rsquo s 4.5 per cent cap rate. Its price-to-book valuation of 0.75 times stands much lower than its pre-Covid and long-term mean ratios, in his view. 

 

&ldquo Therefore, we think the market could be pricing in some form of equity fund-raising due to (Lendlease Global Reit&rsquo s) high gearing,&rdquo said the analyst. 

 

Lendlease Global Reit&rsquo s latest gearing of 40.6 per cent for Q4 represents its highest since listing, noted Lee.

 

He estimates a look-through gearing of 50.5 per cent, which makes it the highest-geared Singapore-listed Reit (S-Reit) under Citi&rsquo s coverage.

 

Based on the analyst&rsquo s projections, equity requirements of S$500 million to S$600 million will be required to attain a desired look-through gearing of 35 to 38 per cent, which would result in a lower pro forma net asset value per share.

 

Though the Reit could also potentially sell its sole non-domestic asset Sky Complex to improve its headline and look-through gearing, Lee cautioned of a challenging transactions market in Europe due to high interest rates.

 

&ldquo While we do not see near-term risk of Singapore retail cap rate expansion, we understand investors typically remain wary of higher-geared S-Reits in a rising interest rate climate.&rdquo

 

Lendlease Global Reit, which counts 313@Somerset among its portfolio investments in Singapore, has an adjusted interest coverage ratio (ICR) of two times. This also represents the lowest ICR among Citi&rsquo s covered S-Reits, said Lee, with FY2024&rsquo s projected ICR slightly lower at 1.8 times.