Analysts at Maybank Securities, DBS Group Research, UOB Kay Hian, and PhillipCapital are keeping their “buy” calls on Lendlease Global Commercial Trust (LREIT), while Citi Research analyst Brandon Lee maintains his “neutral” call.
While Maybank, DBS and Citi have kept their target prices of 70 cents, 90 cents and 61 cents respectively, UOBKH analyst Jonathan Koh has raised his target price to 93 cents from 87 cents previously and PhillipCapital analyst Liu Miao Miao has lowered her target price to 83 cents from 86 cents previously.
For its 1HFY2024 ended Dec 31, 2023, LREIT announced a distribution per unit (DPU) of 2.10 cents, compared to 2.45 cents for the same period last year, due to higher borrowing costs amidst higher interest rates.
Read more: Lendlease Global Commercial REIT announces DPU of 2.1 cents for 1HFY2024
Maybank analyst Krishna Guha notes that the REIT’s DPU for the period is lower by 6.7% h-o-h and 14.3% lower y-o-y, while its revenue and net property income (NPI) of $119.9 million and $93.4 million was up 17.9% and 22.2% y-o-y respectively.
“Growth was led by improved operational performance of malls and recognition of supplementary rent from the lease restructure of Sky Complex (offices in Milan). Excluding the supplementary rent of around $13 million, revenue and NPI for 1HFY2024 rose 5.1% y-o-y,” writes Guha.
The analyst understands that LREIT restructured its office lease in Milan to reduce single-tenant exposure and repositioned one of the buildings in the office complex to secure multi-tenancies at market rents, while the other two buildings continue to be master leased to existing tenant, Sky Italia, with a positive rental uplift of 1.5% and without pre-termination rights until January 2033.
Guha adds: “The recognised supplementary rent is approximately equal to two years of the prevailing rent of the returned building. LREIT intends to use the amount for fit-out capital expenditure (capex) and/or supporting distribution. Despite improved NPI, distribution was down due to higher borrowing expenses.”
Meanwhile, he notes that there are no incremental updates on LREIT’s Grange road car park redevelopment or addition of bonus gross floor area (GFA) for 313@Somerset. “We expect borrowing costs to go up further with ongoing repricing of hedges,” adds the analyst.
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After factoring in higher borrowing costs, he lowers his DPU estimates by around 7% on average, writing: “While funding conditions remain challenging for the highly geared LREIT, valuation at 6.8% forward yield, 0.6x book value discounts the risks, in our view.”
Upside factors for LREIT noted by Guha include the economy and tourism’s rebound resulting in strong growth in rents for its JEM retail and 313@Somerset malls, capital recycling and Singapore’s pure-play positioning and benign macro conditions addressing the refinancing of perpetual securities and overall cost of debt.
Conversely, downside risks include elevated gearing and rising cost of funding, elevated cost of funding complicating redemption of perpetual securities and the give up of space or non-renewal of leases by anchor tenants in the REIT’s office assets in Italy and Singapore.
Meanwhile, DBS analysts Geraldine Wong and Derek Tan forecast LREIT’s earnings before taxes, interests, depreciation and amortisation (ebitda) to grow at a compound annual growth rate (CAGR) of around 7% in FY2023 to FY20255, driven by a further rental reversion upside for its key assets, 313@Somerset and JEM.
They write: “We expect these properties to see positive rental reversions of 5% to 15% in the coming years, underpinned by strong tenant sales, exceeding pre-Covid levels by 15%, and healthy occupancy cost levels.”
According to the team at DBS, LREIT is “unlikely to pursue” equity fundraising (EFR) at 0.8x price-to-book ratio (P/B), given its stable financial metrics and strong lender support.
“Instead, our preferred scenario is the asset sale of the JEM Tower or Sky Complex, Milan. Selling this could reduce gearing to around 32% with minimal DPU dilution,” write Wong and Tan.
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Key risks noted by the pair include a higher-for-longer interest rate environment, which could prompt a further cutting of estimates.
UOBKH’s Koh agrees with the sentiment, observing that the REIT “could consider” divesting its office block at JEM, which is fully leased to the Ministry of National Development (MND) under a 30-year lease with a rent review every five years.
He adds: “We estimate that the office block at JEM provides a NPI yield of 3.5% and is valued at $480 million.”
Koh also looks forward to the construction of LREIT’s multi-functional event space at Grange Road Car Park, which is scheduled to commence in 1HFY2024, and will take 12 to 18 months and is expected to be completed in 1HFY2025.
Share price catalysts noted by him include 313@Somerset’s benefitting of employees returning to their offices in the CBD and the return of tourists, the new multi-functional event space at Grange Road Car Park, and JEM’s benefitting from the development of Jurong Gateway as Singapore’s second CBD.
Meanwhile, PhillipCapital’s Liu expects LREIT’s tenant sales to “benefit the top line” with the influx of Chinese tourists, facilitated by the 30-day visa-free policy.
Noting the departure of the master lessee in Building 3 of the REIT’s Sky Complex in Milan, Liu does not “expect any impact” on DPU as the tenant has paid two-year rental supplements to be distributed over the two years.
After factoring in the higher-for-longer borrowing costs, the analyst’s downward adjusted target price reflects a projected FY2024 to FY2025 DPU of 4.16 to 4.59 cents, and her interest rate assumption has also been raised by 0.2%.
Finally, Citi’s Lee has assumed a risk-free rate of 3.5%, an overall cost of equity of 10.1% and a terminal growth of 0% in his valuation.
“We have not factored in any potential earnings accretion or dilution from any unannounced acquisitions. For re-valued net asset value (RNAV), we value LREIT’s properties at a weighted average cap rate of 4.5%,” writes Lee.
Key upside factors noted by him include higher-than-expected rental rates on the back of stronger-than-anticipated economic growth or asset enhancement initiatives, a reduction in borrowing costs; and a higher-than-projected DPU and NAV accretion from new acquisitions.
As at 1.46 pm, units in Lendlease Global Commercial Trust are trading at 0.5 cents higher or 0.82% up at 62 cents on Feb 7.
