Analysts from Citi Research and DBS Group Research are keeping their “buy” calls on Lendlease Global Commercial REIT (LREIT) JYEU after the REIT’s business update for the 3QFY2023 ended March 31 reflected operational improvements in its portfolio. The analysts have also kept their target prices unchanged at 78 cents for Citi and $1 for DBS.
On May 9, LREIT reported an overall portfolio committed occupancy of 99.8% as at March 31, unchanged q-o-q. Its weighted average lease expiry (WALE) stood at 8.3 years by net lettable area (NLA) and 5.4 years by gross rental income (GRI).
The REIT’s retail portfolio occupancy stood at 99.5% while achieving positive retail reversion of 3.3% year-to-date (ytd). While the REIT did not release its occupancy rate for its office portfolio, it revealed that its offices achieved positive rental escalation of 4% for Sky Complex in Italy. LREIT’s office portfolio also had a long WALE of 12.2 years by NLA and 15.0 years by GRI.
As at March 31, LREIT’s gearing stood at 39.3% while its interest coverage ratio (ICR) stood at 4.6 times. The REIT’s fixed rate borrowings were only at 61% while its weighted average cost of debt stood at 2.51% per annum (p.a.).
“Our assets continued to perform well, underpinned by a high portfolio occupancy with a long WALE of 5.3 years by GRI, which will ensure long-term cashflow stability. With refinancing out of the way, we plan to focus on organic growth through proactive asset management and managing our leases,” said Kelvin Chow, CEO of the manager, in LREIT’s statement.
To Citi’s Brandon Lee, the REIT’s business update “painted an improving retail operational landscape, evidenced by better q-o-q positive rent reversion, stable occupancy and tenant sales now at 17-18% above pre-Covid”.
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The team of analysts at DBS also noted that LREIT’s flagship 313@Somerset continued to “drive good growth” for the REIT on sustained strong tenant sales.
“Its unique offering that shies away from high-end luxury offering with large exposure to experiential retail and social trade sectors such as food and beverage (F&B) has done well for tenant sales for the mall, maintaining consistently above pre-Covid levels, in tune to what we have witnessed for most suburban retail malls,” says the DBS team.
“[313@Somerset’s] Proximity to Somerset MRT station will be key to attaining shopper traffic and retail sales from tourists coming to visit the Orchard belt area,” it adds.
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To Citi’s Lee, LREIT’s relatively higher gearing, albeit better than most of its retail peers, and lower adjusted ICR of 2.0x is likely to have contributed to the REIT’s underperformance ytd. However, he adds that the REIT manager’s latest comments on its strategy ahead, which focuses on the maximisation of LREIT’s own portfolio and pre-emptive equity fund raising may remove any potential equity overhang.
That said, the analyst estimates that LREIT’s shopping traffic at 15.4 million, down 10% q-o-q, is still around 10% below its pre-Covid-19 levels.
With the construction of the multi-functional event space at 313@Somerset to begin in 3Q2023 and is likely to be completed by 2024, Lee believes that maiden income contribution from the event space (though small at less than 1% of LREIT’s net property income or NPI) and spillover visitation into the mall would only come in during LREIT’s FY2025.
At its current unit price levels, Lee believes LREIT’s valuations remain cheap with its yield of 6.9%, compared to its larger-cap peers’ yields of 5.5% to 5.7%.
He adds that asset divestments are a key catalyst to the rerating of LREIT’s unit price.
To the DBS team, LREIT may focus on growing its portfolio organically instead of conducting acquisitions for the time being. It also does not foresee divestments to happen in the near-term with Sky Complex still being below sub-market rents, where there’s potential to extract further value from the property before divesting it.
“In the coming two years, LREIT will look to start the commencement of Grange Carpark facility towards 3Q2023, alongside further extraction of plot ratio at 313@Somerset (up to 10,200 sq ft), which we think they will look to unwind near the completion of Grange Carpark facility to minimise operational disruption,” the team writes.
On LREIT’s positive rental reversions, the team notes that there is still room for further reversionary rents with 313@Somerset continuing to drive “good growth” for the REIT. Passing rents also continue to point to further upside, adds the team with the average along the Orchard Road belt continuing to hover some 5% to 10% below pre-Covid-19 levels.
Units in LREIT closed 1 cent lower or 1.46% down at 67.5 cents on May 9.
