Analysts from CGS-CIMB Research and UOB Kay Hian agree that the acquisition of the remaining stake in Jem by Lendlease Global Commercial REIT (LREIT) is positive on all counts.
See: Jem acquisition adds income stability, defensiveness to LREIT
CGS-CIMB’s Eing Kar Mei and Lock Mun Yee have reiterated their “add” call as they see the accretive acquisition to enhance LREIT’s income stability through the diversification and higher exposure to the suburban retail sector.
They have, however, lowered their target price to 95.4 cents from 95.6 cents on an expected higher base as the REIT intends to fund the acquisition via an equity fund raising, amongst other means.
On Feb 15, LREIT announced that it would be increasing its stake in Jem to 100% from 31.8% previously.
“Based on the purchase consideration of $1.42 billion, the acquisition yield works out to be 4% or 4.4% (with or without the effects of Covid-19 related one-off abatements and expected credit loss) and 0.3% discount to the property’s independent appraised value,” write the analysts in their Feb 15 report.
Based on the REIT’s pro forma financial performance in the 1HFY2022, the acquisition is accretive to its distribution per unit (DPU) by 6.8% to 10.5% based on a 100% stake, note the analysts. The amount depends on whether the effect of the one-off Covid-19 impact is included, they add.
Post-acquisition, which is slated to be completed by May 15, LREIT will be the 16th largest Singapore REIT (S-REIT) by portfolio value, up from its current position of 33rd place.
To the analysts, the acquisition was an expected move, even though it came in earlier than anticipated.
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“We like Jem as it is one of the largest suburban malls in Singapore with 100% committed occupancy and enjoys strong catchment from the surrounding residential area and future developments. We understand that the mall remained resilient despite Covid-19 impact,” they write.
“It is a mixed development with the office component fully leased to Singapore’s Ministry of National Development on a 30-year lease with rent reviews every five years, which provides cash flow stability. The acquisition would also allow Jem to enjoy tax transparency, continue the analysts.
According to LREIT’s manager, the REIT plans to focus on Singapore with Paya Lebar Quarter and Parkway Parade in the pipeline, say Eing and Lock.
Despite the accretive acquisition, the analysts have adjusted their DPU estimates for the FY2022 to FY2024 by -2.2% to +0.6% on the back of the higher base effect. They have also lowered their income assumptions for the Grange Road carpark.
“We also raise our cost of equity (COE) assumptions given the rising rate environment. Upside and downside risks include accretive acquisitions and weaker rental income [respectively],” say the analysts.
UOB Kay Hian analyst Jonathan Koh has kept his “buy” rating on LREIT with a higher target price of $1.08 from $1.03 previously.
According to his report on Feb 16, share price catalysts to the REIT include a larger market cap and free float, as well as higher trading liquidity leading to higher weightage in the FTSE EPRA Nareit Developed Asia Index.
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Like the CGS-CIMB analysts, Koh is positive on the acquisition as it enables LREIT’s portfolio to become more “diversified and resilient”.
“The proposed acquisition expands LREIT's assets under management (AUM) by 2.1 times to $3.6 billion. The resilient and defensive suburban retail will account for 46.8% of the enlarged portfolio compared to 16.3% based on the existing 31.8% effective stake. In terms of trade sector mix, the acquisition increases the exposure to essential services and non-discretionary trade from 52% to 59% of gross rental income,” he notes.
In addition, Jem benefits from a strong catchment of an estimated 1.1 million residents in the area.
The advanced manufacturing hub of Jurong Innovation District will create over 95,000 new jobs, while the upcoming Tengah Forest Town will add 42,000 new homes upon its completion. In addition, Jurong has a car-free town centre and 20% of land will be dedicated green spaces. The area will be served by the new Jurong Region MRT Line, which will open in stages from 2027 to 2029, notes Koh.
To this end, the analyst has upped his DPU estimates for the FY2023 by 0.6%.
“We assumed [an] equity fund raising (EFR) of 1.025 billion new units at 80 cents each and additional S$- denominated bank borrowings of $828 million at interest rate of 2.2%. The funding mix between debt and equity is 47:53,” he writes.
Units in LREIT closed flat at 84 cents on Feb 16.
Photo: LREIT
