Lendlease Global Commercial REIT - DBS Research 2020-03-18: The Perfect 10


Lendlease Global Commercial REIT - The Perfect 10

  • Vast majority of leases expiring in FY20 renewed at 313@somerset, high tenant stickiness a positive.
  • Largely fixed rental structure (c.95%) and tenant stickiness limits impact from COVID-19 oubreak.
  • 313@somerset at 40% discount to valuation.
  • Currently trading of 10.6% yield, a 460bps premium to comparable peers; Accumulate!

What's New

Tenant support package at 313@somerset

  • The manager will disburse a variety of tenant support measures to boost traffic and to assist tenants who are impacted by the current covid-19 outbreak. Some of these tenant support measures include a rental abatement in the range of 0.2-0.4 months per month for April and May 2020, which will be given on a selected basis to affected tenants.
  • Lendlease Global Commercial REIT will also be passing on the full savings from the 15% property tax rebate announced in Singapore Budget 2020.

Sky Italia remains a strong credit worthy tenant.

  • Broader macro risk shrouds Italy as it is the second worst affected country after China by the COVID-19 outbreak.
  • In a bid to minimise operational disruptions, Lendlease Global Commercial REIT’s largest and sole tenant at Sky Complex (Milan), has activated business contingency plans.
  • The commercial lease is grounded by a triple net lease structure, with a long lease term expiring in 2032, and we see zero rental escalations (pegged to ISTAT consumer price index) as a bear-case scenario.
  • Rental payments from Sky Italia had been made on a timely manner with no arrears due and remains a tenant with high creditworthiness.

Resilient rents underpinned by tenant stickiness and highly fixed income structure

  • Vast majority of the c.33% of rental leases by GRI expiring in FY20 (year end June) had been renewed;
  • Shopper traffic for February at the mall dipped c.15% y-o-y and was made largely stable by 313@somerset’s diversification away from tourist footfall and expenditure;
  • Trade sectors that saw the most impact include the jewellery & watches and souvenir & gift trade sectors (less than 5% of GRI);
  • Given 313@somerset’s high tenant retention ratio of more than 99% and largely fixed rental revenue ( > 95%) that is cushioned from an immediately dip in tenant sales.

313@somerset priced at 40% below appraised value

  • Based on the last closing price of S$0.48, we estimate that the market is pricing 313@Somerset at S$2,400 psf or an implied yield of 6.3%.
  • This is c.40% below its appraised value and is attractive when compared against valuations of Orchard Road malls, which are in excess of S$3,500 psf.

Beyond undervalued, maintain BUY; Target Price revised to S$0.94.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-18
SGX Stock Analyst Report BUY MAINTAIN BUY 0.94 DOWN 1.050