Lendlease Global Commercial REIT - UOB Kay Hian 2021-02-15: 1HFY21 Benefitting From Recovery In Domestic Consumption

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LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - 1HFY21 Benefitting From Recovery In Domestic Consumption

• Contribution from 313@Somerset has normalised with occupancy improving 3.1ppt q-o-q to 98.7% in 2QFY21. 313@Somerset will benefit from increased shopper traffic from the redevelopment of the Grange Road car park site, while Sky Complex will benefit from redevelopment of the Milano Santa Giulia (MSG) into a major decentralised office district in Milan.
• Lendlease REIT provides an attractive distribution yield of 6.0% for FY21 and trades at a 7% discount below NAV per unit of S$0.85.
• Maintain BUY. Target Price: S$0.97.

Lendlease REIT's 1HFY21 (Jul 2020 to Dec 2020) Results

1HFY21 DPU of S$0.0234, up 0.8% y-o-y and in line with our expectations.

• Lendlease Global Commercial REIT (SGX:JYEU)'s gross revenue grew 3.2% y-o-y. NPI grew by a slower 1.6% y-o-y due to an increase of 7.6% y-o-y for property operating expenses caused by the provision for doubtful debts of S$1.5m for some tenants at 313@Somerset.

313@Somerset: Benefitting from recovery in domestic consumption.

• Gross revenue from 313@Somerset grew 32.2% h-o-h in 1HFY21 as there was two months of rent waiver incurred in 2HFY20.
• Occupancy at 313@Somerset improved 3.1ppt q-o-q to 98.7% in 2QFY21 due to the securing of new tenants, of which 40% are experiential retail and F&B concepts. New tenants include virtual reality arcade New World Carnival and footwear specialist Skechers. New F&B tenants include Paris Baguette, Tamago-En and Josh’s Grill.
• Tenant sales have recovered from 70% to 75% of pre-COVID-19 levels.
• Shopper traffic was maintained at 60% of pre-COVID-19 levels.

Sky Complex: Providing income stability.

• Gross revenue from the Sky Complex grew 4.3% h-o-h. Lendlease REIT benefitted as the Euro strengthened 3.2% against the Singapore Dollar in 1HFY21.
• Occupancy at Sky Complex is maintained at 100%.

Healthy balance sheet.

• Lendlease REIT has healthy aggregate leverage at 35.5% and interest coverage ratio at 8.5x. Its average cost of debt is low at 0.88%.
• Lendlease REIT does not have any refinancing till FY23. NAV per unit is S$0.85.

313@Somerset and Sky Complex are high quality real estate.

• 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.
• Sky Complex is fully leased on a triple net basis to Sky Italia, a subsidiary of Comcast Corporation, until 15 May 32 (12 years plus 12 years).

Defensive qualities enhanced by long WALE.

• Lendlease REIT’s long weighted average lease to expiry of 9.3 years by NLA and 4.9 years by gross rental income (GRI) provides income stability. Only 2% and 6% of the portfolio NLA and GRI remain for renewal in 2HFY21.

Enhancing attractiveness of 313@Somerset to youth and young professionals.

• Lendlease REIT has commenced lease for the Grange Road car park site. The new multi-functional dedicated event space is expected to be operational in the 1H22. The plug-and-play event space will feature an indoor live performance venue, an independent cinema, hawker stalls serving local delights and other F&B attractions. It will draw more shopper traffic to 313@Somerset.

MSG evolving into major decentralised office district.

• The Milano Santa Giulia (MSG) redevelopment project will transform MSG into Milan’s key decentralised office district. The southern zone, where Sky Complex is located, has been designated as the new business district in Milan. The northern zone is being redeveloped into a large urban park that integrates smart technology and sustainability initiatives.
• The Winter Olympics will be held in the northern zone in 2026. The new Metro Line 4 that connects Rogoredo station and Linate Airport is scheduled to be completed by 2023.

Laggard with attractive yield spread and discount to NAV.

• Lendlease REIT provides an attractive Singapore’s 10-year government bond yield of 1.0%.
• Lendlease REIT's share price trades at a significant 7% NAV per unit of S$0.85.

Lendlease REIT - Valuation & Recommendation

• We maintain our existing DPU forecast for Lendlease REIT. Maintain BUY.
• See Lendlease REIT Share Price; Lendlease REIT Target Price; Lendlease REIT Analyst Reports; Lendlease REIT Dividend History; Lendlease REIT Announcements; Lendlease REIT Latest News.
• Our target price of S$0.97 is based on dividend discount model (COE: 6.0%, terminal growth: 1.0%).
• Lendlease REIT's share price catalyst:
  • Normalisation in domestic consumption post Phase 3 of reopening.
  • The return of tourists with gradual reopening of Singapore’s international borders in 2022 and 2023.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.970 SAME 0.970