Lendlease Global Commercial REIT - CGS-CIMB Research 2021-06-01: Potential Acquisition On The Cards


Lendlease Global Commercial REIT - Potential Acquisition On The Cards

  • Lendlease REIT's issuance of inaugural perp is likely to be used to fund acquisitions.
  • We expect DPU accretive acquisition size of S$200m-300m.
  • ADD for its resilient income vs pure retail REITs and attractive valuation.

Lendlease REIT's inaugural perp was oversubscribed

  • Lendlease Global Commercia REIT (SGX:JYEU) issued perpetual securities of S$200m, which will bear an initial distribution rate of 4.2% per annum for the first 5 years. The first reset of the distribution rate will be on 4 June 2026, with subsequent resets occurring every 5 years thereafter.
  • Its inaugural perp securities attracted strong demand from a wide range of high quality institutional and retail investors and were oversubscribed, enabling Lendlease REIT to upsize the transaction from S$150m to S$200m with price tightening to 4.2% from the initial guidance of 4.35%.
  • The issuance of perp does not come as a total surprise given the relatively higher cost of equity of Lendlease REIT, which makes accretive acquisitions difficult. As Lendlease REIT has no refinancing needs until FY23, the issuance of perp, we believe, will mainly be used for acquisitions to prevent a dilution of DPU.

Embarking on second acquisition?

  • While Lendlease REIT has a global mandate to acquire commercial properties, its focus will mainly be in Singapore for now, where it has three ROFR assets (Parkway Parade, Jem and Paya Lebar Quarter) from its sponsors. Of the three assets, Lendlease REIT has acquired a 5% stake in LARIF 3 (Lendlease Asian Retail Investment Fund 3 Ltd), which holds 75% of Jem (an integrated office and retail development at Jurong Gateway).
  • We believe part of the issuance of perp could be used to acquire an additional stake in Jem. Recall that Lendlease REIT’s main intention to acquire the initial 5% stake in LARIF 3 was to gain pre-emptive rights to increase its strategic stake in the fund over time if other investors were to divest of their interests.
  • Considering the amount of perp securities raised and estimated debt headroom of S$120m at 40% gearing, we believe Lendlease REIT could be looking at acquisitions sized S$200m-300m with gearing likely to be maintained below 40% for acquisition flexibility in the future. With the combination of debt and perp, we believe Lendlease REIT could deliver accretive acquisition(s).

Heightened alert to weigh on the recovery of 313@Somerset but impact will be spread out

  • We believe the recent heightened alert in Singapore, which means working-from-home by default and the prohibition of dining in, will affect shopper traffic of 313 given its location on Orchard Road and that 37.7% of the mall’s FY20 gross rental income was generated from food & beverages. Judging from its shopper traffic and tenant sales y-o-y performance in Jan 2021, we believe its 3QFY21 (Jan 21- Mar 21) shopper traffic was at 60-70% of pre-COVID-19 levels while tenant sales were at 70-80% of pre-COVID-19 levels.
  • Our carpark vacancy tracker for 313 also showed a sharp increase in vacancy since the implementation of the heightened alert on 16 Jun 2021. The heightened alert will continue to weigh on the recovery of both operating metrics, which is likely to lead to tougher lease negotiations between 313 and tenants.
  • However, we do not expect the potential weak rental reversion to affect Lendlease REIT’s overall financial performance substantially as the impact will be spread out as and when the leases are up for renewals. As at 3QFY21, Lendlease REIT had only 6% and 20% of leases by gross rental income up for renewals in FY21 and FY22, respectively. In addition to this, ~60% of the mall’s NLA are embedded with annual rental escalations of ~3%.
  • Rental rebates for its tenants will have a larger impact on the bottomline but we understand Lendlease REIT has not given out any since Jul 20. If Lendlease REIT gives out one month of rental rebates to all its tenants at 313, our FY21 DPU will fall by 5.8%.

The opening of event space at Grange Road carpark should help to offset the impact of a slower recovery

  • The redevelopment of Grange Road carpark is expected to commence in 2H2021 and is set to complete in 2022. We understand that two-thirds of the space (NLA ~42k sf) has been leased to Live Nation, which is an American events promoter and venue operator, one of the world’s leading live entertainment companies.
  • More importantly, Lendlease REIT has received a lot of reverse leasing enquiries for the space. We previously estimated that the commencement of this event space would raise our DPU by 10% (has been factored into our forecast from FY23 onwards), which will help to buffer the impact of potentially slower recovery at 313.

Reiterate ADD at a higher target price of S$0.87

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-06-01
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