DBS Group Research analysts Geraldine Wong and Derek Tan have kept a “buy” rating on Lendlease Global Commercial REIT (LREIT) with an increased target price of $1.10 from $1.05.
To Wong and Tan, LREIT is a hidden gem with the potential to emerge as a strong contender within the retail S-REITs space. “With JEM in the bag, we believe that the risk-reward profile for LREIT has turned more favourable with higher growth visibility, riding on the rebound of its key assets 313@Somerset and JEM going forward,” the analysts say.
On a pro-forma 1HFY2022 basis, net property income (NPI) with the inclusion of JEM will more than double from $29.6 million to $72.1 million, including one-off impact due to Covid-19 arising from rental rebates and discounts.
Distributable income will almost double from $28.6 million to $57.2 million for the same period, observe the analysts.
LREIT’s FY2022 results exceeded the analysts’ full year expectations with JEM’s acquisition delivering one quarter worth of rental contribution for the full year. “We continue to expect further rental upside from JEM in FY2023 primarily from higher reversionary rents, ancillary income and further net lettable area (NLA) optimization within JEM retail,” write Wong and Tan.
In addition, JEM’s office component also paints a familiar picture to LREIT’s Sky Complex, a master-leased office asset in Milan, say the analysts. The office component of JEM is fully leased to the Ministry of National Development of Singapore (MND) on a long WALE of 24 years. Portfolio portion of stable income will increase from the previous around 23.5% (including 31.8% ownership stake in JEM) to 24.9%.
Tan and Wong observe that the FY2023 and FY2024 forward yields are compelling at 6.1% and 6.4% respectively for a reopening play with an acquisition growth story.
LREIT continues to trade at a yield discount of 80-110 basis points (bps) to peers within the large cap retail space which the analysts believe is unwarranted and should compress over time. “We believe the market will start to appreciate LREIT’s enhanced value proposition to match the large cap peers due to their Singapore centric strategy with an attractive pipeline of dominant commercial assets under right of first refusal (ROFR); added leg of resilience with growing suburban exposure and stable long-standing office leases; acquisition growth visibility; and reopening prospects in FY2023-FY2024,” the analysts write.
Central passing rents also continue to be at an inflexion point alongside staggered lease renewals. 313@Somerset posted a surprise surge in tenant sales in 4QFY2022. “We believe investor sentiment is improving for landlords with full year reversions at the mall at a positive approximate 5%,” say Wong and Tan.
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“We expect recovery in passing rents in the coming financial year from the current approximate 10%-15% discount to FY2019 levels at around $17.80 per sq ft per month,” the analysts add.
The analysts have priced in JEM and rolled forward valuations to FY2023, where their discounted cash flow valuation assumes a 3.0% risk free rate.
As at 12.56pm, units in LREIT are trading flat at 85 cents with a distribution yield of 6.1%.
