Lendlease Global Commercial REIT - DBS Research 2020-09-17: Lotus Flower In Bloom; Rocking To A New Beat At 313@Somerset

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LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Lotus Flower In Bloom; Rocking To A New Beat At 313@Somerset

• Grange Road carpark redevelopment to extend Lendlease REIT’s footprint to c.330k sqft within Somerset.
• Acquisition of a stake in JEM overlooked at current valuations.
• Rental disparity gap against Orchard peers may catch up with 313@Somserset’s growing dominance.

Rocking to a new beat at 313@Somerset

• Going from strength to strength, 313@Somerset to emerge as the dominant mall within Somerset area. Contrary to investors perception, we believe that the dominant positioning of 313@Somerset and stickiness of its leases are not well understood and yet to be reflected with Lendlease REIT (SGX:JYEU) trading at P/NAV of 0.78x with a forward yield of 7.7%. The mall has proven to be able to hold up amid the COVID-19 storm.
• We had previously shortlisted 313@Somerset as one of the dominant malls in Singapore due to its
  1. prime location along Orchard Road with direct connectivity to Somerset MRT Station,
  2. sizeable footprint of 288k sqft with expansion potential from the uplift in unutilised plot ratio and with additional GFA from Grange Road car park redevelopment,
  3. strong positioning targeting millennials, and
  4. superior tenant sales generation.
• These qualities could be the factors behind the mall’s historically high tenant retention rate at over 90%. With short term catalysts of plot ratio maximisation and redevelopment of Grange Road carpark, 313@Somerset will likely go from strength to strength, and further anchor the mall’s strong positioning within the Somerset precinct.

Occupancy steady within 313@Somerset despite the circuit breaker disruption; traffic and sales to head towards pre-COVID levels in coming quarter.

• Occupancy rate at 313@Somerset dipped 1.4 ppts q-o-q to 97.8% as at end June 2020, with a high tenant retention rate of 87% (c.93% in the previous quarter). We believe the slightly lower occupancy is transitionary in nature.
• Footfall has recovered to 40% of pre-COVID levels for the month of June with tenant sales recovery led by the electronics and food & beverage trades. Since July 2020, based on our site visits, we understand that traffic and sales are rising towards pre- COVID levels which is a positive sign for Lendlease REIT.
• With tenants potentially doing better and starting to clock in more sales, we anticipate lower rental assistance will be required in the coming quarters, implying that the worst is most likely over for Lendlease REIT.

Eat play shop.

• The mall has a large percentage of tenant exposure to the food & beverage (39% of GRI) and fashion (29% of GRI) trade categories, but we note that there are currently only three entertainment tenants at the mall. The new plug-and-play event space at Grange Road carpark will be a step forward for 313@Somerset as a one stop entertainment hub with the inclusion of a cinema operator The Projector, and events promoter Live Nation.
• The repositioned mall will be able to better compete with neighbouring retail malls with cinema operators such as Orchard Cineleisure and Plaza Singapura, and extend the average shopper’s length of stay per trip and dollars spent at the mall.

Rental disparity gap may play catch up in the medium term.

• Passing rent at 313@Somerset at c.S$18 psf pm continues to lag rents along prime Orchard Road which are in the range of c.S$25 - S$30 psf pm. We think that this rental disparity may see some compression in the medium to longer term given the mall’s dominant characteristics. Moreover, we estimate tenant sales generation to match that of landmark malls in the precinct such as Paragon Mall.

Valuation gain exceeded expectations.

• Valuations held up well at Sky Complex due to strong investment interest and solid cash flows from longstanding lease with quality tenant, Sky Italia. Lendlease REIT’s quality assets were able to generate valuation gains for the latest quarter - 313@Somerset appreciated 0.5% from a year ago, as opposed to a c.3-4% decline in retail valuations reported by peers.

Potential acquisitions on the horizon.

• The acquisition of quality suburban malls JEM (Jurong) and possibly Parkway Parade (Marine Parade) or a partial stake in Paya Lebar Quarter (office component) may unfold in the near to medium term horizon. We believe that the acquisition of stakes in either property will likely utilise a greater proportion of debt given its high cost of equity.
• See Lendlease REIT Share Price; Lendlease REIT Target Price; Lendlease REIT Analyst Reports; Lendlease REIT Dividend History; Lendlease REIT Announcements; Lendlease REIT Latest News.
• With a gearing headroom ranging from S$280m (based on 45% gearing) to S$450m (50% gearing), there is capacity for Lendlease REIT to drive higher growth in DPUs. That said, a more sustained recovery in share price will increase Lendlease REIT’s potential to tap the equity market in order to grow its AUM more meaningfully given its attractive pipeline of properties for acquisition
• See PDF report attached below for complete analysis on Lendlease REIT.

Singapore Research DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-09-17

SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 UP 0.850