Lendlease Global Commercial REIT - UOB Kay Hian 2020-11-27: Benefitting From Recovery & Rejuvenation; Initiate Coverage With BUY

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LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Benefitting From Recovery & Rejuvenation; Initiate Coverage With BUY

• Lendlease REIT’s largest asset, 313@Somerset, has a unique positioning due to its youth orientation and prime location sitting on top of Somerset MRT Station, which is one of the busiest MRT stations in Singapore. The mall benefits from:
  1. recovery in visitor arrivals;
  2. rejuvenation of Orchard Road; and
  3. car park redevelopment at Grange Road.
• Sky Complex, its office properties in Milan, Italy, provides income stability due to long WALE of 11.6 years.
• Initiate coverage on Lendlease REIT with BUY. Target Price: S$0.97.

Lendlease REIT - Background

Mandate to invest globally.

• Lendlease Global Commercial REIT (SGX:JYEU) invests in a diversified portfolio of stabilised income-producing properties located globally, which are primarily used for retail and/or office purposes. It aims to provide unitholders with regular and stable distributions and long-term growth in distribution per unit (DPU) and NAV per unit, while maintaining an appropriate capital structure.

Retail in Singapore and office in Italy.

• Lendlease REIT’s initial portfolio comprises:
  • 313@Somerset, a retail mall located at the shopping belt of Orchard Road in Singapore; and
  • Sky Complex, which comprises three Grade A freehold office buildings in Milan, Italy. The portfolio has a total NLA of 1.3m sf with an appraised value of S$1.4b as at Jun 20.
• Lendlease REIT was included in the MSCI Singapore Small Cap Index on 29 May 20, a short span of 7 months after listing.

313@Somerset – A Magnet For Youth

Somerset sub-precinct is a youth hub.

• 313@Somerset has a unique positioning due to its youth orientation and prime location sitting on top of Somerset MRT Station, which is one of the busiest MRT stations in Singapore. It is strategically located along Orchard Road, the dominant shopping belt in Singapore. It enjoys prominent street frontage and is highly visible in Orchard Road and Somerset Road. Its Discovery Walk is a highly popular and bustling meeting place for the youth and young professionals.
• 313@Somerset attracted shopper traffic of 45.5m on average for FY17, FY18 and FY19.

313@Somerset benefits from the rejuvenation of Orchard Road.

• The Singapore Tourism Board, the Urban Redevelopment Authority (URA) and the National Parks Board plan to strengthen Orchard Road’s position as a must-visit and vibrant lifestyle destination. Orchard Road will offer differentiated experiences to bring out the unique identity of the four sub-precincts, namely Tanglin, Orchard, Somerset and Dhoby Ghaut.
• The Somerset sub-precinct will be enhanced with new lifestyle offerings catering to the youth. The car park at Grange Road will be transformed into a dynamic event space where activities are regularly refreshed. The newly opened Design Orchard will inject greater retail diversity and showcase promising home-grown brands. It also provides incubation spaces and a rooftop amphitheatre. The new developments will be connected by sculptural canopies to provide shelter and seamless connectivity at this busy intersection.

Redevelopment of car park at Grange Road.

• Lendlease REIT has won the tender to redevelop the car park at Grange Road into a dedicated event space, which will draw more shopper traffic to 313@Somerset. The plug-and-play event space will also have an independent cinema, hawker stalls serving local delights and other F&B attractions. The extension, built at a cost of S$10m, will add an NLA of 42,000sf and is expected to be operational in 2Q22.
• Lendlease REIT will collaborate with Live Nation, a leader in live entertainment, to create an exciting calendar of concerts, films and events. Museum of Food will provide experiential attractions for locals and tourists to savour local cuisine. This is part of the government’s push for Singapore’s hawker culture to be recognised by UNESCO.

Benefitting from recovery in visitor arrivals.

• Singapore will gradually reopen its international borders to maintain Singapore Changi Airport’s hub status. The challenge is to restore passenger volume while keeping the COVID-19 transmission under control. The government will consider replacing the 14-day isolation period, which is a major deterrent to travellers, with a rigorous testing regime. Lendlease REIT benefits from the recovery in visitor arrivals in 2H21. Tourists accounted for 18% of shopper traffic at 313@Somerset.

Built-in organic growth from rental escalation.

• Leases are typically structured with 3-year tenures. About 60% of 313@Somerset’s leases by NLA have step-up structure with average rental escalation at 2.7%.
• 313@Somerset has maintained a healthy occupancy rate of 95.6% and a retention rate of 80% in 1QFY21 despite the COVID-19 pandemic. It has a quality and diversified tenant base of 142 tenants across 13 trade sectors. Key tenants at the mall include Food Republic, Cotton On, Sony, Marche and Haidilao. It also has omni-channel retailers as tenants, such as Love, Bonito and Pomelo.

SKY Complex – Providing Income Stability

Benefitting from migration towards the Periphery sub-market.

• Sky Complex comprises three Grade A office buildings completed in 2008 (Buildings 1and2) and 2015 (Building3). The buildings are connected by a multi-level bridge suspended above ground to facilitate easy access between the buildings. It has large and efficient floor plates, which meet the needs of regional and global organisations.
• Sky Complex is located at Milano Santa Giulia, which is a 20-minute drive from Milan’s CBD and a 10-minute drive from Linate Airport. It is 150m from the Milano Rogoredo Railway Station (which has access to several regional and suburban lines and high-speed trains towards Bologna, Florence, Rome and Naples) and Rogoredo Metro Station (which has access to the Milan Metro Line 3 or Yellow Line of the Milan Metropolitan Subway network).

Milano Santa Giulia: A promising new office area.

• Milano Santa Giulia is an emerging and vibrant office area in the Periphery sub-market. It has raised its profile as a key decentralised office and mixed-use destination. Milano Santa Giulia has registered one of the highest take-up rates for office space in Milan. There are many new developments in the vicinity of Sky Complex, but they are expected to be fully pre-let prior to completion due to strong demand and take-up.
• Large and multi-national corporations which prefer Grade A spaces have relocated to the Periphery sub-market due to the availability of large office floor plates at a lower cost compared to prime CBD areas. Land is scarce in central areas of Milan. On the other hand, the Periphery sub-market has ample supply pipeline of 3.55m sf, of which 60% is developed as built-to-suit. Rents are expected to increase due to the continued flight towards good quality office space in the Periphery sub-market.

Quality blue chip tenant.

• Sky Complex is fully leased on a triple net basis to Sky Italia until 15 May 32 (12 years plus 12 years). The triple net structure minimises operational costs and risks to Lendlease REIT. Sky Italia is able to exercise break option in 2026 by giving 12 months’ advance notice. Sky Complex’s long WALE of 11.6 years provides income stability.
• Sky Italia is a subsidiary of Comcast Corporation, the second largest broadcasting and cable TV company in the world. Comcast acquired Sky, the largest media company and pay TV broadcaster in Europe, in Sep 18. Sky Italia is Sky’s satellite TV platform in Italy. It has 4.9m subscribers and 4,000 employees.

Downside protection from rental escalation.

• Sky Complex has an annual rental step-up based on 75% of ISTAT’s CPI variation.

Potential Acquisition Pipeline From Sponsor Lendlease Corporation

Strong sponsor with global presence.

• Lendlease REIT’s sponsor is Lendlease Corporation (LLC AU), which is part of Lendlease Group.
• Lendlease Group, which was established in 1958, is headquartered in Sydney, Australia. It is an international property and infrastructure group with core expertise in shaping cities and creating connected communities with operations in Australia, Asia, Europe and the Americas.
• Lendlease Group’s vision is to create the best places by striving for world leading standards for safety, innovation and sustainability. It has a strong track record of delivering innovative and sustainable property and infrastructure solutions globally. It has three business segments, namely development, construction and investments.
• Lendlease Corporation is listed on the Australia Stock Exchange.

Sizeable development pipeline.

• The Lendlease Group has a development pipeline value of A$113b and funds under management of A$36b. It is a trusted investment manager to more than 150 investors (including sovereign wealth funds, pension funds and insurance companies) in property and infrastructure investments.

Maiden step in strategy to grow via acquisitions.

• Lendlease REIT completed the acquisition of a 5% stake in Lendlease Asia Retail Investment Fund 3, which has a 75% interest in Jem, for consideration of S$45m on 1 Oct 20. Jem is an integrated office and retail development at Jurong Gateway, Singapore’s second CBD. The mall is next to Jurong East MRT station. Nearby amenities include Ng Teng Fong General Hospital and Jurong Regional Library.
• Jem is a mixed-use development with total NLA of 892,000 sf (retail: 65%, office: 35%). Anchor tenants for the six levels of retail space include FairPrice Xtra, Cathay Cineplex and Don Don Donki. Other tenants are Koufu, Uniqlo, H&M and Courts. The 12 levels of office space are fully leased to the Ministry of National Development.
• Being an investor in Lendlease Asia Retail Investment Fund 3, Lendlease REIT gains pre-emptive rights to increase its strategic stake in Fund 3 over time when other investors divest their stakes in Fund 3. Sponsor Lendlease Group retains a 15.1% stake in Fund 3 post-acquisition.

Expanding through sponsor pipeline.

• Lendlease REIT will increase its exposures to other gateway cities through ROFR provided by its sponsor. Lendlease Group has a strong presence in Singapore through Jem (15.1% stake), Parkway Parade (10.2% stake) and Paya Lebar Quarter (30% stake). It also has long-standing presence in Australia, Asia (Singapore, Malaysia, China and Japan), Europe (Italy and the UK) and the US.

Sponsor aligned to interest of unitholders.

• There is alignment of interest with Lendlease Group holding a 25.3% stake in Lendlease REIT.

Lendlease REIT - Valuation

Ample upside with target price at S$0.97.

• Our target price for Lendlease REIT of S$0.97 is based on the DDM.
• Key assumptions to our valuation include:
  1. We have used a discount rate of 6.0% with risk-free rate at 2.0% and equity risk premium at 5.0%;
  2. Our beta is conservatively set at 0.8x; and
  3. We have assumed terminal growth of 1.0%.

Laggard with attractive distribution yield and yield spread.

• Lendlease REIT provides attractive distribution yield of 7.1% for FY21 and 7.3% for FY22. Comparable retail REITs (excluding those with huge overseas exposures, such as CapitaLand Retail China Trust (SGX:AU8U), Mapletree North Asia Commercial Trust (SGX:RW0U) and Sasseur REIT (SGX:CRPU)) are trading at an average distribution yield of 5.8% for FY21 and 6.2% for FY22.
• Lendlease REIT provides attractive yield spread of 6.2% for FY21 and 6.4% for FY22 above Singapore 10-year government bond yield of 0.9%.

Value beckons due to significant discount to NAV.

• Lendlease REIT trades at a significant 20% discount below NAV per unit of S$0.83. Comparable retail REITs are trading at an average discount of 9% to NAV. We expect the discount to gradually diminish with the normalisation of consumer confidence and spending after Phase 3 of reopening.
• See Lendlease REIT Share Price; Lendlease REIT Target Price; Lendlease REIT Analyst Reports; Lendlease REIT Dividend History; Lendlease REIT Announcements; Lendlease REIT Latest News. 
• See attached 14-page PDF report for complete analysis on Lendlease Global Commercial REIT (SGX:JYEU).

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-27

SGX Stock Analyst Report BUY INITIATE BUY 0.97 SAME 0.97