LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)
Lendlease Global Commercial REIT - 3QFY21 Quality Of Portfolio Enhanced
- 313@Somerset enjoys healthy occupancy of 98.6% and tenant sales grew 1.4% y-o-y in Feb 21 and 16.4% y-o-y in Mar 21. 313@Somerset will benefit from increased shopper traffic from development of the multifunctional event space at the Grange Road car park site, while the valuation of Sky Complex has potential to increase.
- Lendlease REIT provides an attractive FY21 distribution yield of 6.1% and trades at an 8% discount below NAV/unit of S$0.85. Maintain BUY. Target price: S$0.97.
WHAT’S NEW
- Lendlease Global Commercial REIT (Lendlease REIT, SGX:JYEU) provided a business update for 3QFY21.
313@Somerset: Benefitting from recovery in domestic consumption.
- Occupancy for 313@Somerset remains stable and high at 98.6%. Tenant sales grew 1.4% y-o-y in Feb 21 and 16.4% y-o-y in Mar 21. Tenant retention ratio was healthy at 62%. Leases representing only 3% of gross rental income are up for renewal in 4QFY21.
- New tenants at 313@Somerset include Tsuta (world’s first Michelin-starred ramen), Mrs Pho (authentic Vietnamese food), Vanda Botanical Deserts (specialty dessert) and Gadget Mix (lifestyle electronic brand). Lendlease REIT will focus on targeted promotional campaigns to boost shopper traffic and tenant sales.
Sky Complex: Providing income stability.
- Occupancy at Sky Complex is maintained at 100%. The Lombardy region was downgraded from Red zone to Orange zone in Apr 21. Live broadcasting with limited audience in attendance continued to take place at Sky Complex. Lendlease REIT benefitted as the € strengthened 0.5% y-o-y against the S$ in 3QFY21. Sky Complex provides income stability due to long weighted average lease expiry of 11.1 years.
Healthy balance sheet.
- The aggregate leverage is healthy at 35.4% and interest coverage is high at 7.7x. 75% of Lendlease REIT’s borrowings are denominated in €, which provides a natural hedge and keeps cost of debt low at 0.88%. Lendlease REIT has no refinancing till FY23.
STOCK IMPACT
Attracting youth and young professionals to 313@Somerset.
- Construction at the Grange Road car park site is expected to commence in 2H21. The multifunctional event space will feature an indoor live performance venue, an independent cinema, hawker stalls serving local delights and other F&B attractions. The event space was substantially leased to Live Nation Entertainment (ticker: LYV US), a leading live entertainment company, as anchor tenant. The new attraction is seamlessly connected to 313@ Somerset’s Discovery Walk, a walking street lined with restaurants and linked to Orchard Road. It will draw more shopper traffic to 313@Somerset when completed in 2022.
Focusing on expansion in Singapore.
- Lendlease REIT completed the acquisition of a 5% stake in Lendlease Asia Retail Investment Fund 3, which has a 75% interest in Jem, for a consideration of S$45m on 1 Oct 20. Jem is an integrated retail and office development at Jurong Gateway, Singapore’s second CBD. The property is next to Jurong East MRT station. 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.
Jem is a gem.
- New tenant IKEA has commenced operations at Jem in Apr 21. This is IKEA’s first small-store concept in Southeast Asia spanning over 70,000sf across three levels. Muji will also be expanding to offer more lifestyle products. Other new tenants include Tsui Wah, Scoop, Pizzakaya, iSteak and simpleBurger.
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. Italy’s largest music academy, Giuseppe Verdi Conservatory, will set up a new campus in the south zone of MSG, adjacent to Sky Complex, by end-25.
Winter Olympics brings prominence.
- The northern zone is being redeveloped into a large urban park that integrates smart technology and sustainability initiatives. The new Metro Line 4 connecting Rogoredo station to Linate Airport should be completed by 2023. The Winter Olympics will be held in the northern zone in 2026.
Upside for valuation of Sky Complex.
- Sponsor Lendlease Group is developing two Grade A office buildings, Spark One and Spark Two, adjacent to Sky Complex. Spark One is 80% pre-let to Saipem, a global engineering company, at €300psm per year, much higher than €178psm per year for Sky Complex. This will provide upside for valuation of Sky Complex when the new office buildings are completed.
EARNINGS REVISION/RISK
- We maintain our existing DPU forecast.
VALUATION/RECOMMENDATION
- Laggard with attractive yield spread and discount to NAV. Lendlease REIT provides attractive distribution yield of 6.1% for FY21 and 6.2% for FY22, representing yield spread of 4.5% and 4.6% above the Singapore 10-year government bond yield of 1.6%.
- Lendlease REIT trades at a significant 8% discount below NAV/unit of S$0.85.
- Maintain BUY. Our target price of S$0.97 is based on the dividend discount model (cost of equity: 6.0%, terminal growth: 1.0%).
- See
SHARE PRICE CATALYST
- Normalisation in domestic consumption due to progressive re-opening and completion of COVID-19 mass vaccination.
- The return of tourists with gradual re-opening of Singapore’s international borders in 2022 and 2023.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-05-10
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