Lendlease Global Commercial REIT - UOB Kay Hian 2022-02-16: Eking Out Mild DPU Accretion


Lendlease Global Commercial REIT - Eking Out Mild DPU Accretion

  • Jem is a dominant suburban mall at Jurong Gateway, the commercial hub of Jurong Lake District. The acquisition has increased AUM by 2.1x to S$3.6b, of which the resilient suburban retail accounts for the lion’s share of 46.8%.
  • By securing full ownership of 100%, Lendlease REIT (SGX:JYEU) is able to generate tax savings of S$5.6m per year. It will also benefit from a potential increase in weightage in the FTSE EPRA Nareit Developed Asia Index.
  • Lendlease REIT's FY23 distribution yield is attractive at 6.3%. Maintain BUY. Target Price: S$1.08.

Expansion to suburban retail through full ownership of Jem.

  • Lendlease REIT has announced the proposed acquisition of the remaining 68.2% stake in Jem based on agreed property value of S$2,079m. Jem generated NPI of S$90.8m and provides NPI yield of 4.4% in FY21 (excluding COVID-19-related one-off rental abatements and expected credit loss).
  • Sponsor Lendlease Group stays invested in Lendlease REIT. Lendlease REIT will acquire 13.1% stake in Lendlease Asian Retail Investment Fund 3 (ARIF3) from sponsor Lendlease Group for S$116m to be satisfied by issuance of 142m new Lendlease REIT units at S$0.82. Lendlease Group will also subscribe to its pro rata share in the preferential offering of S$118m.
  • Jem is an integrated office and retail asset located in Jurong Gateway (touted to be Singapore’s second CBD), the commercial hub of the Jurong Lake District. It has direct connectivity to both the Jurong East MRT interchange station and bus interchange and is near amenities, such as the Ng Teng Fong General Hospital. It is one of the largest suburban malls in Singapore with six levels of retail space. Its retail tenants include IKEA, FairPrice Xtra, Cathay Cineplexes, Don Don Donki, Uniqlo and Koufu. Its office component has a long WALE of 24 years. Jem's office component comprises 12 levels of office space fully leased to the Ministry of National Development (MND) under a 30-year lease with a rent review every five years. Jem has committed occupancy of 100%.
  • Strong catchment from the estimated population of 1.1m residents. Jurong Innovation District, a 600ha advanced manufacturing hub, will create over 95,000 new jobs. The first phase would be completed in 2022. The upcoming 700ha Tengah Forest Town is set in lush greenery and will add 42,000 new homes (public housing: 30,000 units, private properties: 12,000 units) upon completion. It has a car-free town centre and 20% of land will be dedicated green spaces. The area will be served by the new Jurong Region MRT Line, which will open in stages from 2027 to 2029.

Becoming more diversified and resilient.

  • The proposed acquisition expands Lendlease REIT's AUM by 2.1x to S$3.6b. The resilient and defensive suburban retail will account for 46.8% of the enlarged portfolio compared to 16.3% based on the existing 31.8% effective stake.
  • In terms of trade sector mix, the acquisition increases the exposure to essential services and non-discretionary trade from 52% to 59% of gross rental income. The government through the Ministry of National Development accounted for 12% of gross rental income. Portfolio WALE also improves from 8.4 to 8.9 years.

Benefitting from tax transparency.

  • Lendlease REIT attains tax transparency by owning 100% of Jem. It will be able to generate recurrent tax savings of S$5.6m per annum.
  • Squeezing out yield accretion. The acquisition is accretive to pro forma 1HFY22 DPU by 3.6% (excluding COVID-19-related one-off rental abatements and expected credit loss incurred by Jem). Pro forma NAV per share as of Dec 21 is slightly reduced by 1.2% to S$0.80. The calculation assumes equity fund raising (EFR) with issuance of 1,025m new units at S$0.82 to raise S$837m.
  • Target completion by Jun 22. EGM will be held on 7 Mar 22 to seek unitholders’ approval for the proposed acquisition of the remaining 68.2% effective interest in Jem. Lendlease REIT will also seek unitholders’ approval for the issuance of 1,265.3m new units through private placement and non-renounceable preferential offering.

Focusing on expansion in Singapore.

  • 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 Paya Lebar Quarter (30% stake) and Parkway Parade (10.2% stake). It also has long-standing presence in Australia, Asia (Singapore, Malaysia, China and Japan), Europe (Italy and the UK) and the US.

Lendlease REIT - Earnings forecast revision & recommendation

  • We assumed EFR of 1,025m new units at S$0.80 each and additional S$- denominated bank borrowings of S$828m at interest rate of 2.2%. The funding mix between debt and equity is 47:53. We raised our existing FY23 DPU forecast by 0.6%.
  • More uncertainties as acquisition is sizeable. Financial markets have become choppy. Execution risk for completing the acquisition has increased.
  • Maintain BUY call on Lendlease REIT. Our target price of S$1.08 for Lendlease REIT is based on DDM (cost of equity: 6.0%, terminal growth: 1.2% (previous: 1.0%)).
  • Catalysts:
    • Larger market cap and free float and higher trading liquidity leading to higher weightage in the FTSE EPRA Nareit Developed Asia Index.
    • 50% of employees allowed to work from their offices since 1 Jan 22, which increased shopper traffic and tenant sales at downtown malls, such as 313@Somerset.
    • Gradual reopening of Singapore’s international border to tourists with addition of more es (VTL) and increase of VTL quota in 2H22 and 2023.
  • See

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-16
SGX Stock Analyst Report BUY MAINTAIN BUY 1.08 UP 1.030