Lendlease Global Commercial REIT - UOB Kay Hian 2022-05-06: Ingesting The Acquisition Of Jem In 3QFY22

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Ingesting The Acquisition Of Jem In 3QFY22

313@Somerset maintained positive rent reversion at mid single-digit and high occupancy of 99.4% in 3QFY22. Sky Complex will enjoy rental escalation of 4.68% starting May 22 based on the 6.24% increase in ISTAT CPI in Apr 22.
Lendlease REIT (SGX:JYEU) benefits from full contribution and tax transparency from Jem in FY23 as the acquisition of the remaining 68.2% stake was completed in Apr 22.
Lendlease REIT provides an attractive FY23 distribution yield of 7%. Maintain BUY.

Portfolio occupancy was stable at 99.9% in 3QFY22. Occupancy at 313@Somerset eased slightly by 0.3ppt q-o-q to 99.4%. The downtown mall maintained positive rent reversion at mid single-digit.
Strengthened tenant mix with refreshed offerings. New tenants at 313@Somerset include kskin (express beauty care from South Korea), Chinese Tofu Magician (chewy mochi drink from Hunan, China), Sukiya (authentic beef bowl from Japan) and Fjallraven (outdoor apparel from Sweden). 313@Somerset has a healthy tenant retention rate of 71.1%. Only 1% of the portfolio’s total NLA is due for renewal for 4QFY22.
Deploying bonus GFA for new tenancies on prime spaces. 313@Somerset has untapped GFA of 10,860sf due to the increase in permissible plot ratio from 4.9 to 5.6. Lendlease REIT has utilised 660sf of the untapped GFA to expand leasable space at two prime units at the ground floor leased to Puma (sportswear) and Ohayo Mama San (concept cafe). The remaining untapped GFA of 10,200sf will be deployed during fit-out periods for new tenants to avoid disruption to the operations of other tenants.

Sky Complex is on a long lease term to Sky Italia until 2032 and annual rental escalation is based on 75% of the changes in ISTAT consumer price index (CPI). ISTAT CPI increased 6.24% in Apr 22. Thus, Sky Complex will enjoy rental escalation of 4.68% starting May 22. Sky Complex maintained full occupancy of 100%. It has long weighted average lease expiry (WALE) of 10.1 years.

Lendlease REIT has completed the acquisition of the remaining 68.2% stake in Jem on 22 Apr 22. Jem achieved positive rent reversion in 3QFY22. With ownership of Jem at 100%, Lendlease REIT is able to generate recurrent savings of S$5.6m per year from tax transparency.
Becoming more diversified and resilient. The acquisition expanded 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% previously, based on its previous 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. Jem has a quality base of tenants, such as IKEA, FairPrice Xtra, Cathay Cineplexes, Don Don Donki, Uniqlo and Koufu. The government through the Ministry of National Development accounted for 12% of gross rental income. Portfolio WALE will also improve from 8.4 to 8.9 years.

Lendlease REIT has low aggregate leverage of 27.7% as of Mar daylighting to maximise the use of natural sunlight, usage of low-E double glazed glass for the facades, and installation of solar panels.

The acquisition of the 68.2% stake in Jem was funded by private on DDM (cost of equity: 6.25% (previous: 6.0%), terminal growth: 1.2%).
See
Share price catalysts:
- All employees have been allowed to work from their offices since 1 Apr 22, which will increase shopper traffic and tenant sales at downtown malls, such as 313@Somerset.
- Reopening of Singapore’s international borders through the vaccinated travel scheme, which 2, bringing tourists back to shop at Orchard Road.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-06

SGX Stock Analyst Report BUY MAINTAIN BUY 1.05 DOWN 1.080