Lendlease Global Commercial REIT - DBS Research 2020-02-11: 313@Somerset In A Landlords’ Market

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - 313@Somerset In A Landlords’ Market

LendLease Global Commercial REIT (SGX:JYEU)’s first set of results exceeded IPO forecasts. We remain positive on the dominant characteristics of both 313@somerset and Sky Complex.
While Orchard retail malls had been in troubled waters recently given the coronavirus outbreak, 313@somerset remains resilient as it diversified away from the reliance on tourist receipts.

With just 25 leases remaining across the portfolio, representing 3% of portfolio NLA and a high retention ratio, we remain confident of its ability to churn resilient cashflows in the medium term.
BUY, Target Price of S$1.05.

LendLease Global Commercial REIT (SGX:JYEU) reported gross revenue and net property income for the quarter of S$21.4m and S$16.2m, outperforming IPO forecast by 1.0% and 3.2% respectively. DPU of 1.29 Scts exceeded forecast by 3.1% but is in line with our estimates.
Better-than-expected top-line performance was mainly contributed by higher rents from 313@somerset, while lower property operating expenses flowed through to the bottom line.
The portfolio maintained high committed occupancy of 99.8% and WALE at 10.1 years by NLA, supported by healthy leasing momentum at 313@somerset and the stability of Sky Complex asset which is under an extended lease term until 2032.
Growth momentum will continue to be underpinned by rental escalations from 313@somerset and Sky Complex. Approximately 60% of leases at 313@somerset have built-in escalations of 3% per annum while rental escalation at Sky Complex is tied to 75% of the ISTAT consumer price index variation.
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The permissible plot ratio for 313@somerset had been increased from 4.9+ to 5.6 in the latest Master Plan review. This will translate into another 1,008 sqm of gross floor area to be potentially deployed.
While no concrete plans had been laid out, we understand that key considerations would include the expansion plans of current tenants, potential operational disruptions and cost factors.
One option would be the conversion of the sixth floor car park into commercial space.

Several new concepts introduced to 313@somerset included a home grown fashion brand and several F&B tenants to draw shopper footfall. Leases renewed in the past quarter were at a positive 0.5% rental reversion.
There is an additional 11% of its GRI to be renewed in the 2HFY20, which we anticipate the manager to continue to actively manage the portfolio tenant mix in order to continue to the evolving retail landscape and changing consumer preferences.
Given the historical tenant retention rate of c.93% at 313@somerset, we do not see potential non-renewals as a risk to the mall’s current high occupancy.

LendLease Global Commercial REIT’s gearing ratio stood at 34.9% for the quarter on a debt maturity of 3.6 years.
Weighted average running cost of debt is at a low 0.86% per annum, with almost 100% of debt on a fixed rate.
Euro-denominated income from Sky Complex is also hedged until end FY2021.
This substantially lowers most of LendLease Global Commercial REIT’s interest rate and exchange rate risks for at least FY20 and FY21.

The manager remains on the lookout for acquisition possibilities with metrics including the following:
1. stabilised with > 80% occupancy,
2. minimal AEI needed in the future, and
3. value accretive to the REIT.
In our view, while investors remain on the lookout for the potential injection of Paya Labar Quarters (PLQ) in Singapore in phases (office towers; followed by retail) into LendLease Global Commercial REIT, we believe that the real surprise will come from the Sponsor’s stake in JEM or Parkway Parade (or if possible the entire property subject to fund investors’ agreement). If successful, we believe that these dominant suburban malls will anchor the REIT’s longer-term earnings resilience and diversify away its earnings reliance on 313@somerset.
We have not priced in any acquisitions in our estimates.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-11

SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050