CGS-CIMB Research analyst Lock Mun Yee has cut her target price on Lendlease Global Commercial REIT (LREIT) from $1.05 to $1.02, although she still maintains her “buy” call.
In an Aug 9 note, Lock writes that LREIT’s FY2022 earnings were lifted by its acquisition of Jem and Singapore’s strong reopening.
LREIT’s FY2022 revenue and net property income (NPI) grew by 29.3 and 32.7% respectively, coming in at $101.7 million and $75.5 million.
This was boosted by the accretive acquisition of Jem and better operating performance at 313@somerset, allowing the REIT’s distribution per unit (DPU) to grow by 3.6% y-o-y.
LREIT’s FY2022 NPI margins improved y-o-y from 72.4% to 74.3% and are expected to remain at this normalised level.
As for its malls, tenant sales are about 15%-18% above pre-Covid levels, compared to the market average of about 10%. Lock points out, “we understand that 313@somerset has achieved a higher pre-Covid sales level compared to Jem, lifted by returning tourists.”
Occupancy at both malls currently stand at 99.9% for 313@somerset and 99.5% for Jem, and FY2022 reversions for 313@somerset and Jem have been positive, with the former coming in at 3.6%.
Going forward, she expects demand for these two “well located, dominant malls” to persist, keeping occupancy high.
Overseas, annual rental escalations for LREIT’s Sky Complex in Italy are based on 75% of Italy’s consumer price index (CPI) growth, which increased 6.8% y-o-y in May 2022.
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Impact from rising electricity rates is mitigated by fixed-rate electricity contracts, which will run until June 2023 while the master lessee is responsible for Sky Complex’s utility expenses under the triple-net lease structure.
Lock says that LREIT’s gearing still is still “comfortable” although more interest rate hedging is expected from its management.
Post-acquisition of JEM, cost of debt jumped q-o-q from 0.98% to 1.69% while its interest rate
hedge declined from 90% to 59%.
For LREIT, Euro-denominated loans account for 28% of total borrowings, with 100% of its euro loans hedged. In contrast, only 43% of its SGD denominated loans are hedged.
Going forward, management intends to increase its interest rate hedge, Lock notes that its gearing remains slightly elevated at 40%, but well within MAS's 50% gearing limit and mitigated by its “robust” interest coverage ratio of 9.2x.
Separately, Lock has lowered her FY2023-2024 DPU estimates by 3.9%-4.1% as higher revenue assumptions were wiped out by higher borrowing assumptions.
The acquisition of Jem has strengthened LREIT’s portfolio, she adds, increasing market capitalisation by 1.8x to $1.8 billion.
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“We expect organic growth on the back of positive reversions as well as the unlocking of about 10,000 sq ft or 3.5% of untapped gross floor area (GFA) at 313@somerset.”
Lock also notes LREIT’s pipeline assets of Parkway Parade and Paya Lebar Quarter, saying the latter could be acquired in tranches due to its strata title.
LREIT's FY2023 distribution yield of 6.1% is 'attractive': UOBKH
UOB Kay Hian analyst Jonathan Koh has upped his target price on LREIT to 96 cents, a marginal increase from his previous target price of 95 cents.
The analyst has also kept "buy" on the REIT as it delivered "good results" for the 2HFY2022 with its DPU at 2.45 cents, which is in line with his expectations.
The way he sees it, the REIT has several positives, including benefitting from the return of domestic consumers and tourists.
The REIT is also able to maximise returns from its newly-acquired asset, Jem, which has become the REIT's largest asset after it completed the acquisition of the remaining stake it did not own in April.
That said, the REIT's sensitivity to higher interest rates has led the analyst to trim his DPU estimates for the FY2023 to FY2024 by 3.1% and 1.3% respectively.
"59% of the borrowings are hedged to fixed rates. Management estimated that every increase in the base rate of 50 basis points reduces DPU by 2.8%. We expect cost of debt to reach 1.90% by end-FY2023," Koh writes.
As of 2.47pm, shares of LREIT were trading at 82.5 cents, with a FY2023 P/B ratio of 1.06 and dividend yield of 6.12%.
