Lendlease Global Commercial REIT - DBS Research 2020-05-06: Steering Steady Amidst The COVID Storm

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Steering Steady Amidst The COVID Storm

Lendlease Global Commercial REIT's 3Q20 results beat IPO forecasts; payout ratio maintained at 100%.
Tenant sales declined 15-20% y-o-y for the quarter.
Softer expectations for 4Q20 as second round of rental relief is expected to set in.
Lendlease Global Commercial REIT currently trades at 0.7x price-to-book, a sharp discount to sector mean of 1.1x.

Despite ongoing COVID-19 disruptions, 313@Somerset continued to show resiliency with a historically high tenant retention of > 90% and low risk of non-renewals in the coming quarter with only 2% of lease expiries. Sky Complex (Milan) continues to benefit from a sticky relationship with tenant Sky Italia, grounded by a triple net master lease expiring in 2032.
We expect the impact of COVID-19 to heighten in the coming quarter (4Q20), as Lendlease Global Commercial REIT (SGX:JYEU) has set forth relief arrangements to waive rents for the months of April and May.

Lendlease Global Commercial REIT's revenue and NPI reported for the quarter were S$21.6m and S$16.6m, exceeding IPO forecasts by 2.2% and 4.0% respectively. This was attributed to higher rental income from 313@somerset and higher contribution from Sky Complex due to a stronger Euro.
Lendlease Global Commercial REIT's DPU of 1.28 Scts is 0.7% higher than IPO estimates, with the REIT in a comfortable liquidity position to maintain a 100% payout ratio. Interest coverage ratio of 11.2x stands as one of the strongest within both the retail sector and among all S-REITs.

Portfolio occupancy held steady at 99.8%, with occupancies unchanged at both 313@somerset (99.2%) and Sky Complex (100%).
Tenant sales took a beating as COVID-19 impacted sales for the months of February and March, dipping 15-20% y-o-y.
We understand that 60% of 313@somerset’s tenants are within the ‘essential services’ classification, and 36% of mall tenants are currently operational.
Tenants’ rental burden had been lifted for April and May and will be covered by rental rebates provided by Lendlease Global Commercial REIT and government property tax.
Security deposits are still in place and can be used in the future to fulfil rental obligations should the need arise.
Rental reversion for the quarter was positive at 0.6% for YTD to 31 March 2020, and may trend lower in the coming quarter as the mall remains partially shut during this Circuit Breaker period in Singapore.
Nonetheless, we gain comfort from the low lease expiries remaining in the coming quarter (2% of GRI) and past record of high tenant retention of > 90% at the mall.

Sky Complex asset continues to serve as a solid anchor to Lendlease Global Commercial REIT’s portfolio.
The commercial lease is grounded by a triple net lease structure, with a long lease term expiring in 2032.
We see zero rental escalations (pegged to ISTAT consumer price index) as a bear-case scenario.
Approximately one-fifth of the asset is made up of data centres to meet the tenant’s functionalities and we believe that the building is strategic from Sky Italia’s perspective.
Current passing rents are also at a discount to market rents within Sky Complex’s submarket, enhancing tenant stickiness.

Lendlease Global Commercial REIT has an existing cash balance of S$78.2m and uncommitted undrawn debt facility of up to S$20m to fund working capital.
Gearing stands at 35.9% with an average cost of debt of 0.86% and a robust interest coverage ratio of 11.2x (Adjusted at c.5.2x on our estimates in FY20-21F).
Non-essential asset enhancement works will be postponed given the current COVID-19 headwinds.
Near-term plans to deploy an additional 1,008 sqm of GFA is still ongoing and within early stages of planning and is expected to take c.1.5 years to complete.
A concrete timeline was not provided for the execution plans as management will be timing these works with the lease expiries of the affected tenants.

Lendlease Global Commercial REIT stands as our top pick within the retail sector given 313@somerset’s resiliency and the stability of Sky Complex’s lease. The REIT continues to bring forth a strong value proposition at its current 0.7x price-to-book level, while delivering another quarter of earnings outperformance.
A positive surprise was Lendlease Global Commercial REIT’s decision to maintain a 100% payout ratio, stemming from a robust liquidity position.
Our revised target price of S$0.85 factors in conservative estimates for FY20/FY21 with a target yield of 6.0% on revised FY21F earnings, and an implied 1.0x P/NAV.
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 on Lendlease Global Commercial REIT as one of our top sector picks.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-06

SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 DOWN 0.940