Lendlease Global Commercial REIT - DBS Research 2019-12-05: Gem In The Making


Lendlease Global Commercial REIT - Gem In The Making

  • Lendlease Global Commercial REIT's core assets - 313@somerset and Sky Complex - well-positioned in submarkets with long growth runways.
  • Fine balance between income visibility and inbuilt rental escalations.
  • Attractive pipeline of properties from reputable sponsor, Lendlease group.
  • Initiating coverage with BUY and Target Price of S$1.05.

An initial portfolio that is predominantly in Singapore.

  • LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU) offers an opportunity to invest in a diversified portfolio of stabilised income-producing real estate assets that cater primarily to retail and/or office purposes.
  • While the REIT holds a global investment mandate, its initial portfolio comprises 100% ownership of a 99-year leasehold interest in 313@somerset, a retail property located in prime Orchard Road, Singapore and full ownership of a freehold interest in Sky Complex, which comprises three commercial office buildings located in Milan, Italy.
  • The total appraised valuation of the initial portfolio is c.S$1.4bn as of June 2019, anchored by Singapore (c.71.5% of value) and Italy (c.28.5% of value).
  • See Lendlease REIT Share Price; Lendlease REIT Announcements; Lendlease REIT Latest News.

Dominant assets located in areas with longer term potential upside.

  • We believe both assets in the initial portfolio are dominant properties in their respective submarkets.
  • 313@somerset, which is situated in the heart of the Orchard retail precinct in Singapore, offers exposure to burgeoning growth in local and tourist demand. We believe that the property has recently rebounded off multi-year lows and will see stronger operational results and is a proxy to the recovery in Singapore’s prime retail market. In the long run, plans by the Singapore government to convert the adjacent Grange Road Carpark into a dedicated events space as part of a multi-year exercise to rejuvenate the Orchard precinct will also have positive implications for the mall when it materialises.
  • Sky Complex, a Grade- A office building in Italy, is strategically located in one of Milan’s newest and most vibrant office and retail precincts – Santa Giulia - which may lead to value-unlocking opportunities that investors can potentially enjoy over the longer-term.
  • See attached 43-page PDF report for details of Lendlease Global Commercial REIT's key assets.

Lease structure is a balance between stability and growth.

  • Lendlease Global Commercial REIT offers investors a visible earnings stream backed by a long weighted average lease expiry (WALE) of 4.9 years by gross rental income (GRI) and 10.4 years by net lettable area (NLA).
  • This is anchored by a long lease at Sky Complex where the sole tenant (blue chip tenant) at SKY Italia has another c.12.9 years to go on its lease. In Singapore, 313@somerset is projected to deliver steady growth given ongoing tenant retention and remixing strategies.

Built-in rental escalations on majority of leases.

  • As at Jun19, 92.8% of the portfolio’s leases by GRI have step-up structures in the base rent over the term of the lease, of which The Sky Complex, which contributes 28.9% of total GRI, has rental escalation that is pegged to 75% of ISTAT’s index variation. The remaining 63.9% are leases at 313@somerset.
  • For 313@somerset, 58.9% of leases by NLA have an average rental escalation of 3% built in for FY2020.

Backed by established Sponsor with a proven global reach.

  • Lendlease Global Commercial REIT’s sponsor, Lendlease Corporation Limited, is part of the Lendlease Group, has a long track record of successfully managing and operating commercial assets globally. The Lendlease group has A$32.5bn worth of assets under management globally. In Singapore, the Lendlease Group is managing some of the highly successful and iconic shopping malls including 313@somerset, Parkway Parade, Jem and Paya Lebar Quarter (PLQ) which officially launched in October this year.
  • Lendlease Global Commercial REIT should be able to benefit from the Sponsor’s capability across the property value chain, development, construction and asset operations. With A$32.5bn worth of assets under management across the globe, Lendlease Global Commercial REIT can benefit from strategies and promotional campaigns that are exclusive to malls managed by the Lendlease Group.
  • Furthermore, with a development pipeline of approximately A$74.5bn by end value and current funds under management of approximately A$34.1bn, each of which includes retail and office allocations, this could present future acquisition opportunities for Lendlease Global Commercial REIT.
  • See attached 43-page PDF report for Lendlease Global Commercial REIT's management & strategy, and details of its key management team.

Attractive distributable income profile in our view.

  • We forecast Lendlease Global Commercial REIT to deliver an attractive 4.3% growth in DPU between FY20F (annualised) and FY21F, underpinned by steady rental escalations across its initial portfolio. The REIT has a gearing of c.35%, which offers debt-funded capacity to take on any opportunistic acquisitions, if any.

Experienced management team in place.

  • The management team is helmed by industry veterans – CEO Mr. Kelvin Chow, Executive GM, Finance, Mr. Josh Liaw. Both have many years of experience in real estate, finance and risk management.

Initiate with BUY, Target Price: S$1.05 for 12% upside.

  • Initiate with BUY rating; Target Price of S$1.05. We have derived Lendlease Global Commercial REIT’s target price using the discounted cash flow valuation method, given its relatively stable and visible cashflows. See attached 43-page PDF report for Lendlease Global Commercial REIT's DCF valuation details.
  • Lendlease Global Commercial REIT’s initial portfolio mainly comprises assets with defensive attributes, which allows the REIT to generate relatively stable income. Meanwhile, in-built escalations for Sky Complex and the improving market environment benefiting 313@somerset in Singapore offers growth visibility.
  • Our target price reflects a normalised risk-free rate of 2.5%, SG market return of 9.4% and a beta of 0.8x (similar to SG- listed peers with overseas exposures but slight premium to pure SG-focused retail REITs). Our 5.8% WACC reflects 8.0% cost of equity and a 1.8% after-tax cost of debt, with gearing ratio to remain on par with IPO levels at 36.5%. Based on 2.0% terminal growth rate, we derived a target price of S$1.05, implying FY20F and FY21F yields of 5.0% and 5.2% espectively.
  • See attached 43-page PDF report for complete analysis on Lendlease Global Commercial REIT.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-12-05
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