CGS International’s (CGSI) Natalie Ong and Lock Mun Yee have kept their “add” call on Lendlease Global Commercial REIT JYEU (LREIT) at a lowered target price of 71 cents from 74 cents previously.
The analysts write that at LREIT’s 6MFY2024 briefing, its management shared that it has received enquiries for the Jem office at Jurong East and provided viewings to 10 prospective buyers.
“We estimate the valuation of the Jem office at $440 million to $470 million. Should it be divested by April FY2025, divestment proceeds could be used to pay down the $360 million loan maturing in April FY2025, which would otherwise be refinanced at higher rates,” write Ong and Lock.
They estimate a new borrowing cost of around 4.5% if benchmark rates stay at August levels, or around 3.5% if rates fall by 100 basis points (bps), versus the estimated current borrowing cost of 1.85%.
With this, FY2025 distribution per unit (DPU) would dip by 2.8% from Ong and Lock’s base case, with a slight deterioration of FY2025 adjusted interest coverage ratio (ICR) from 1.6 times to 1.5 times.
If management fully repays its FY2025 debt, FY2026 DPU would increase by 8.8% from CGSI’s base case, due to lower borrowing costs, while FY2026 adjusted ICR would be largely unchanged from CGSI’s base scenario.
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They also note that the divestment of LREIT’s Jem office should improve its gearing from 40.9% as at 6MFY2025 to around 35% post-divestment, leaving LREIT with $328 million and $668 million of debt headroom to reach gearing levels of 40% and 45% respectively.
They write: “This would restore LREIT’s inorganic growth potential at a time where interest rates are projected to come down and may present an opportunity for LREIT to acquire positive carry assets, accelerating the recovery of its operating/balance sheet metrics.”
Overall, the analysts believe that the REIT is trading at an attractive FY2025 DPU yield of 6.6%, with multiple strategies in place to improve its operating and balance sheet metrics.
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“Meanwhile, we expect high occupancy to support the positive rental reversion trend at 313@Somerset and Jem.”
Potential re-rating catalysts noted by the pair include stronger rental reversions, faster backfilling of Sky Complex’s building 3, the divestment of Jem and improvements in financial metrics, which should restore LREIT’s ability to grow inorganically.
Conversely, downside risks include weak reversions or leasing and a slowdown in consumer spending, leading to lower turnover rent and weaker tenant sentiment, which could hurt positive reversions.
Units in LREIT closed 1 cent up or 1.68% higher at 61 cents.
