Analysts are mixed on Lendlease Global Commercial REIT JYEU (LREIT) after its business update for the 3QFY2024 ended March 31, with PhillipCapital and Maybank Securities keeping their “buy” calls. Citi Research, on the other hand, has maintained its “neutral” call.
PhillipCapital has an unchanged target price of 83 cents, Maybank has an unchanged target price of 70 cents, and Citi has a target price of 61 cents.
For the 3QFY2024, LREIT’s portfolio committed occupancy plunged 11% y-o-y to 88.88% in the face of the departure of the anchor tenant of Sky Complex, which returned one-third of the space. But on a q-o-q basis, it improved 0.9% due to the backfilling of Sky Complex by 8.1%.
Liu Miaomiao of PhillipCapital cites two positives that have led to the maintaining of her “buy” call. First, Liu notes that LREIT has robust retail rental reversion of 15.3% with 313 achieving about 20% and Jem delivering resilient performance of about 10%.
Although rental reversion for offices saw a slight cooling down, landing at 1.5% in 3QFY2024, stable support came from tenants with long lease periods, contributing to about 22% of the total gross rental income.
“We expect rental reversion for the whole year FY2024 to be about 15%, up from the 4.8% in FY2023,” says Liu.
Next, Liu anticipates rental upside from Building 3 Sky Complex Milan, driven by healthy office demand in the surrounding area and lower-than-average rental rates previously signed by Sky Italia.
LREIT secured 8.1% of the net lettable area (NLA) leases through internal sourcing, and expects backfilling to be completed by 50% by the end of 2024, with the rental reversion of about 30% - 40% to match current market rates.
Jem is also reviewing its rental at the end of 2024, and the current market rental is about 20% higher than the previous rent signed five years ago, Liu notes. “We expect rental escalation to be in the high-teens, resulting in an improvement in revenue by about 2% upon successful negotiation,” says Liu.
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On the redevelopment of the Grange Road carpark, the REIT issued an update that there is some delay in the construction. As such, the analyst expects it to be introduced by 2H2025. The REIT will work with live entertainment company Live Nation to establish a calendar of events such as concerts, film and events.
With the capacity of more than 2,000 concert goers per event, and four events per day, this will translate to an additional footfall of 1 million per year, or about 2.5% of the total 313@Somerset footfall, Liu adds.
“This would lead to higher gross turnover rent (GTO) and a reduction in occupancy rates, paving the way for future rental reversion,” says Liu.
Meanwhile, Liu says that if all current negotiations for Sky Complex in Milan are secured, occupancy rates will surge to about 50%. LREIT is expected to engage with agencies moving forward, and Liu expects the building to be fully backfilled by 2025.
“LREIT is currently trading at FY2024 yields of 7.56% and 0.7 times P/NAV. We expect that Singapore's strong rental reversion momentum will persist in FY2024, with upside expected from the backfilling of Sky Complex Milan,” says Liu. “Our dividend discount model (DDM)-target price remains unchanged at 83 cents, with projected FY2024 - FY2025 distribution per unit (DPU) of 4.16 - 4.59 cents.”
Likewise, Krishna Guha of Maybank says LREIT’s business update indicates that operations remain steady amid a challenging funding environment.
Guha notes that gearing and funding costs for the REIT went up from 40.5% to 41% as about $20 million of debt was drawn down for capex in Sky Complex Building 1 and 2, while tenant Sky Italia also contributed to the capex.
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Funding cost increased from 3.37% to 3.5% q-o-q and the adjusted interest coverage ratio fell to 1.8x from 1.9x, notes Guha, who expects gearing and funding cost to rise as capex related to Building 3 is drawn down unless funding comes from the about $13 million of supplementary rental income received from the restructuring of leases.
“That in turn will pose downside risk to distribution,” says Guha. “While management can acquire an incremental stake in Parkway Parade, divestment is more in focus.”
He notes that the REIT set up a $500 million multi-currency Euro commercial paper programme to issue short-term (less than a year) notes last week.
Guha says that LREIT yields 7.7% and trades at a 40% discount to book, which he thinks compensates for the higher gearing, though he remains watchful on capex drawdown and distribution support. As such, the analyst leaves his forecasts, target price and ratings unchanged.
Finally, Brandon Lee of Citi similarly cites that LREIT has underperformed y-t-d due to its relatively high gearing, which he believes needs to be addressed via asset sales before existing valuations can move closer to the mean.
He notes that both LREIT’s Singapore properties secured a two-year electricity tariff contract at a lower rate, which should lower its utility costs by about 30% per year.
However, while LREIT has no refinancing risks on its committed debt facilities until FY2025, its “relatively high gearing” which is the second highest among Singapore REITs (S-REITs) in Citi’s coverage, and low fixed/hedged debt proportion implies DPU falls by more than 2% by Lee’s estimates, for every 50 basis points rise in floating interest rates.
Lee’s target price of 61 cents for the REIT is based on an average of his DDM and reappraised net asset value estimates. He makes the following assumptions in his DDM valuation: risk-free rate of 3.5%, overall cost of equity of 10.1%, and terminal growth of 0%.
“We have not factored in any potential earnings accretion or dilution from any unannounced acquisitions,” he says.
As at 10.24am, units in Lendlease Global Commercial REIT are trading flat at 55 cents.
