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

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

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!

We hosted a management call for Lendlease Global Commercial REIT (SGX:JYEU) with investors: Key feedback are:

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.

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.

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.

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.

We see attractive re-entry levels after the recent 45% crash in share price for Lendlease Global Commercial REIT, bringing yields to c.10%.
Despite ongoing covid-19 disruptions, we believe that its anchor asset 313@Someset, will deliver resilient results given its positioning away from tourists and our recent visit appears to show crowds are slowly returning.
Headline yields of c.10.3% on an expanded 460bps premium to local retail peers remains attractive and should limit downside to share price.
See Lendlease REIT Share Price; Lendlease REIT Target Price; Lendlease REIT Analyst Reports; Lendlease REIT Dividend History; Lendlease REIT Announcements; Lendlease REIT Latest News.
We maintain our BUY call, 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