Lendlease Global Commercial REIT - CGS-CIMB Research 2020-09-09: An Undervalued REIT


Lendlease Global Commercial REIT - An Undervalued REIT

  • FY21F (Jul 2020 to Jun 2021) will be a fresh start for Lendlease REIT (SGX:JYEU), in our view. It has factored in the potential COVID-19 impact in FY20 and we expect footfall to gradually recover.
  • The portfolio is supported by the long lease structure of Sky Complex and annual escalation from 91% of its NLA, which limits income downside risk.
  • Lendlease REIT is trading at an attractive 0.77x FY20 P/BV vs. sector average of 0.9x. It offers ~7% dividend yield.
  • Initiate coverage on Lendlease REIT with an ADD.

How will Lendlease REIT fare amid the COVID-19 pandemic?

Retail REITs were relatively unscathed during past crises.

  • Our analysis of the historical retail REIT performances in Singapore during times of epidemics and economic downturns have shown that generally, retail REITs have been rather resilient during these periods. When Singapore was hit by the Severe acute respiratory syndrome (SARS) epidemic in 2003, CapitaLand Mall Trust (SGX:C38U) (Target Price S$2.26, see recent report: CapitaLand Mall Trust - A “Not Too Bad” Quarter) was able to register average quarterly growth of 18.6% in total revenues.
  • While we acknowledge that the disruptions to retail operations were less severe in the past, we also want to highlight that retail REITs’ resilient performances during past crises show that consumer spending in Singapore has been rather resilient, which helped the recovery of retailers during these difficult times.

Expect 313@somerset to fare better than its Singapore peers.

  • While we believe that Lendlease REIT’s 313@Somerset retail asset in Singapore will not be spared from the challenges caused by COVID-19, we are of the view that the asset is in a better position compared with other retail malls on Orchard Road due to its lower rental rate, strategic location which connects directly to the Somerset MRT station, and its lower reliance on tourist shoppers as it targets the mass market.
  • Compared with its listed peers on Orchard Road, 313@Somerset has significantly lower income contribution from the more vulnerable fashion-related sectors.

Italian corporates remain resilient amid pandemic.

  • The anchor tenant in Lendlease REIT's Milan property, Sky Italia, is owned by Comcast Corporation (CMCSA US, NR) which continues to be rated A3 (as at Oct 2019) by Moody’s Investors Service and A- by Standard & Poor’s Global Ratings (as at Sep 2019). Outlook remains positive for Milan’s office market in 2Q20.
  • Going forward, Cushman & Wakefield expects availability of existing Grade A spaces to remain limited while demand continues to increase.
  • We do not foresee Sky Complex facing the risk of lease termination or scaling down of floor space used given that it is the headquarters of Sky Italia.

Initiate coverage on Lendlease REIT with an ADD

The stock is trading at 0.77x FY20 P/BV vs. sector average of 0.93x.

  • Lendlease REIT is a laggard in terms of valuation recovery as its P/BV gap with its peers widened from -9 to -16% in Jan 2020 to -17 to -37% as of yesterday. The slower recovery could be due to its higher asset concentration risk. We believe that the recovery of 313@somerset and potential acquisitions would help to close the gap.
  • Lendlease REIT offers a good dividend yield of 6.6% with limited downside risk as it is committed to a 100% payout. We have imputed a -7% rental reversion and 5% pts decline in occupancy rate in FY21F. But, if footfall recovers faster than expected, i.e. faster recovery of traffic towards year-end and office crowds largely recovering from Jan 2021F, we estimate that there could be a 4% upside potential to our FY21F DPU forecast (Fig 9).

We think FY21F is a fresh start for Lendlease REIT as it has factored in the potential impact from COVID-19 in FY20.

  • We believe the worst is over for Lendlease REIT. Going forward, the REIT would focus on marketing to attract shoppers instead of giving out rental waivers to tenants, in our view. We expect a gradual recovery for 313@somerset as COVID-19 in Singapore is under control, with footfall recovering towards year-end especially as overseas travel for Singaporeans is still disallowed and the office crowd returns.
  • Our ground checks at 313@Somerset reveal footfall has been good at the weekend, and decent on the weekdays. Some tenants have seen very encouraging 80% recovery from COVID-19.
  • We expect Lendlease REIT to see more resilient income compared to other malls on Orchard Road given its lower-than-average rental rate, proximity to an MRT station, and lower reliance on tourists given Lendlease REIT’s mass market target base. As compared to its listed peers on Orchard, 313@Somerset has a significantly lower income contribution from the more vulnerable fashion-related sectors at about 40% of 313@somerset’s FY20 income, versus 60% of the retail income of other listed malls on Orchard.

About 41% of Lendlease REIT’s NPI in FY20 was supported by the long lease structure of Sky Complex in Milan, Italy until 2032, with a break lease option in 2026.

  • The asset is leased to Sky Limited, the subsidiary of Comcast Corp (CMCSA US), which is the largest broadcasting company globally and rated A3 and A- by Moody’s and S&P recently. Although there is a break lease option in 2026, we think Sky Limited will not exercise the option given that the rental rate that it is paying currently is attractive, versus the market rate. The tenant has also made large investments in Sky Complex. In addition to this, 91% of Lendlease REIT’s NLA of the portfolio are embedded with annual escalation. These provide strong support to Lendlease REIT’s income.
  • On a portfolio basis, about 84% of our FY21F revenue comprises income with annual escalation, while only about 16% is subject to rental reversion. Its euro-denominated income has been hedged for the next two years.

There are also inorganic growth opportunities, in our view.

  • Lendlease REIT had just won the bid to redevelop the carpark behind 313@somerset into a lifestyle space. This will increase 313@somerset’s NLA by 14-15% as at Jun 2020 and increase our FY23F DPU by a strong 10%. Lendlease REIT has also been granted Right of First Refusal (ROFR) by Lendlease Group which owns assets globally.
  • We think Jem shopping mall in Singapore could be the closest acquisition target and if the acquisition materialises, it could lift our DPU by about 1-2% for FY21-22F, which assumes a 5.5% acquisition yield and debt/equity funding ratio of 50/50.
  • There are also opportunities to unlock the unutilised GFA in 313@somerset, which would lift our DPU further by another 2% in FY21-22F (assuming the asset enhancement initiatives happen in FY21F).
  • Lendlease REIT’s gearing remains healthy at 35% as at Jun 2020, while interest coverage is strong at 9x, versus peers’ 4-6x, which gives it the flexibility to pursue inorganic growth opportunities.

Domestic recovery proxy, attractive valuation and strong yield

  • We believe Lendlease REIT is a domestic recovery proxy for COVID-19 with upside from acquisitions and asset enhancement initiatives (AEIs). We see limited downside risks to our FY21F dividend yield of 6.6% with its 100% committed dividend payout.
  • Lendlease REIT trades at an attractive valuation of 0.77x FY20 P/BV, vs. sector average of 0.93x P/BV and pre-COVID-19 peak of 1.1x FY20 P/BV, which prices in the c.20% valuation decline for 313@somerset, assuming no change in Sky Complex's valuation. Its P/BV gap vs. peers widened from 9- 16% in Jan 2020 to 17-37% as of yesterday, probably due to its higher asset concentration risk.
  • 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 believe the recovery of 313@somerset’s rental income and potential acquisitions in the pipeline would narrow this gap.
  • Downside risks include slower recovery from the COVID-19 pandemic and single tenant risk exposure in Sky Complex.
  • See 50-page PDF report attached below for complete analysis on Lendlease REIT (SGX:JYEU).

EING Kar Mei CFA CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-09
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