Lendlease Global Commercial REIT - Phillip Securities 2022-02-07: Room For Organic & Inorganic Growth

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Room For Organic & Inorganic Growth

Lendlease REIT (SGX:JYEU)'s 1H22 DPU of S$0.0240 (+2.6% y-o-y) was in line, forming 48.4% of our FY22 forecast. DPU was lifted by the acquisition of an additional 28.1% stake in JEM over Aug-Sep21.
313@Somerset occupancy at an all -time high of 99.7%, 17% of GRI de-risked with weighted average reversions in high single-digits.
Gradual deployment of ~11k sq ft from higher plot ratio could lift NPI by 2-3%.

Maintain ACCUMULATE call on Lendlease REIT with DDM target price lowered from S$0.97 to S$0.94.

99.7% occupancy at 313@Somerset is at an all -time high, up 1.0ppt y-o-y. Approximately 20K sq ft of NLA, or 17% of GRI signed in 1H22, reducing FY22 expiries by GRI from 24% to 7%. Leases signed in 1H22 yielded positive, high single-digit reversions, a sharp reversal from negative double-digit reversion seen in FY21.
Lendlease REIT utilised 660 sq ft out of the 11k sq ft arising from the increase in permissible plot ratio from 4.9x to 5.6x. The unlocked space will be deployed to two stores, Puma and Ohayo Mama San, which are located at prime units on the ground floor.
Remixing of tenant mix in earlier quarters has pulled in more shoppers, improving tenants’ sales for existing tenants. Tenants were more willing to renew their leases at higher rates given the improvement in tenant sales.

Lendlease REIT's interest coverage ratio improved q-o-q, from 8.8x to 9.7x (adjusted ICR: 5.0x) with cost of borrowing steady at 0.92%. 90% of borrowing have been hedged in 1H22, lower compared to the 100% hedge employed previously. We understand that this was due to revolving facilities in place, which are usually on floating rates.
Lendlease REIT's gearing improved by 0.8ppts from 34.3% to 33.5%. The management shared that rent in arrears has reduced and is below pre-pandemic levels, crediting the improvement to the rebalancing of tenant mix in favour of tenants that are trading better and have stronger cash flows.

Y-o-y decline in turnover rent. 1H22 GRI was ~7% lower y-o-y due to negative double-digitreversions on 14k sq ft, or 17% of GRI signed at 313@Somerset in FY21.
The negative reversions were inevitable given the tenants' market in 2020 and 2021. However, we think that the strategy to prioritise occupancy and refresh 313's tenant mix has paid off. Lendlease REIT retained and signed tenants that weathered the pandemic well or are expanding, lifting the vibrancy and positioning of 313@Somerset as a lifestyle and shopping destination. This ensured high occupancy and pricing power for positive reversions in 1H22.
Lendlease REIT's 2Q22 tenant sales grew 31.7% q-o-q but were 5.1% lower y-o-y due to tighter restrictions during the Oct-Nov21 period. 1H22 tenants’ sales were 9.2% lower y-o-y, leading to a 30.7% y-o-y decline in GTO revenue.

The remaining 10,200 sqft from the plot ratio uplift will be utilised when there are renewals or changes in tenants to minimise the impact of AEI works on mall vibrancy and recovery of tenants' operations. Lendlease REIT intends to deploy the additional space towards prime locations on the lower floors. Once fully deployed, the additional GFA could increase NPI by 2-3%.
Acquisition of an additional 28.1% stake in JEM in Aug-Sep21 brings Lendlease REIT’s stake to 31.85%. The management is optimistic about acquiring the remaining stake in JEM within the next 12 months and is in discussions with the remaining investors. The remaining stake of JEM carries a valuation of ~S$1.4bn. Gearing of 33.5% implies a debt headroom of ~S$150mil.
All three buildings in Lendlease REIT’s Italian assets, Sky Complex, are 100% leased to Sky Italia, a broadcasting and cable television company. Sky Complex is Sky Italia’s headquarters and only office location. The asset is on a long lease that expires in May 2032, with a lease break option in 2024, subject to a one-year notice period. In-place rents are ~30% below market rents, implying possible positive reversions if the lease break is executed.

Our FY22e-26e DPUs forecast for Lendlease REIT have been lowered by 1.4-1.9% on the anticipated rising cost of borrowing. Our DDM-based target price for Lendlease REIT dips from S$0.97 to S$0.94 on lower DPU estimates and higher cost of equity of 7.72% assumption (previous 7.66%).
Impending acquisition of remaining stake in JEM and deployment of additional GFA at 313@Somerset are catalysts for Lendlease REIT.
See
The current Lendlease REIT's share price implies FY22e DPU yields of 5.7%.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-02-07

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 0.94 DOWN 0.970