Lendlease Global Commercial REIT - UOB Kay Hian 2022-05-18: Ingesting The Acquisition Of Jem

LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU)

Lendlease Global Commercial REIT - Ingesting The Acquisition Of Jem

Jem attracts shopper traffic of 22m per year due to an attractive mix of anchor tenants, such as IKEA, FairPrice Xtra, Don Don Donki, H&M, and UNIQLO. It provides organic growth from positive rent reversion and annual rental escalation of 3.2%. The return of tourists in 2H22 would restore shopper traffic at 313@Somerset back to pre-pandemic levels.
Lendlease REIT's Share Price has corrected 15% from its recent peak and FY23 distribution yield is attractive at 6.8%. Maintain BUY. Target price: S$1.01.

Jem has become Lendlease Global Commercial REIT (Lendlease REIT, SGX:JYEU)’s largest asset, accounting for 46.8% of asset under management (AUM) after it completed the acquisition of the remaining 68.2% stake on 22 Apr 22. The retail component (65% of NLA) achieved positive rent reversion in 2QFY22 and 3QFY22. It provides organic growth with annual rental escalation of 3.2%.
The office component (35% of NLA) is fully leased to the Ministry of National Development (MND) under a 30-year lease with mark-to-market rent reviews every five years. With ownership of Jem at 100%, Lendlease REIT is able to generate recurrent savings of S$5.6m per year from tax transparency.

Jem is a popular suburban mall with shopper traffic at 22m per year and occupancy at 100%. Management plans to unlock additional NLA at level one (4,600sf) and basement one (850sf) to cater for demand for more retail space. The link bridge connecting Jem to Perennial Business City with NLA of over 1m sf is already completed. Perennial Business City is expected to progressively commence operations in 2022, which will increase the flow of office workers visiting Jem.
Over the longer term, connectivity to Jem will improve with the new Jurong Region MRT Line that will commence operations in stages from 2027 to 2029.

The Vaccinated Travel Framework has replaced the Vaccinated Travel Lane scheme since 1 Apr 22 and the requirement for pre-departure COVID-19 tests was subsequently abolished on 26 Apr 22. Visitor arrivals to Singapore have increased 43% m-o-m to 294,304 in Apr 22 (19% of pre-pandemic levels). Shopper traffic was 5.8m in 3QFY22, representing 67% of pre-pandemic levels.
The return of tourists, which typically accounts for 20-25% of shopper traffic, would restore shopper traffic at 313@Somerset back to pre-pandemic levels.

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.

Construction for the redevelopment of Grange Road Car Park into a multi-functional event space had commenced at end-21. The space is anchored by Live Nation, a leading live entertainment company listed on the NYSE (ticker: LYV US). The redevelopment provides double-digit ROI with average rent for NLA of 42,000sf at high single digits.
Live Nation will organise 4-5 events per day with an audience of 2,500-3,500 persons per event, which will draw more youth to 313@Somerset. The event space is expected to be operational by early-23 (18 months to complete).

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 has maintained full occupancy of 100%. It has long weighted average lease expiry (WALE) of 10.1 years as of Mar 22.

Lendlease REIT plans to grow through acquisitions by tapping on the rights of first refusal (ROFR) granted by its sponsor. Lendlease Group has a strong presence in Singapore through Paya Lebar Quarter (30% stake) and Parkway Parade (10.2% stake).

Management has locked in cost of electricity for 313@Somerset and Jem at fixed rates in FY23. Utilities account for 6-8% of operating expenses, lower than comparable retail malls, due to energy saving features, including atrium daylighting to maximise the use of natural sunlight, usage of low-E double glazed glass for the facades, and installation of solar panels.

The euro has depreciated by 5.6% against the Singapore dollar on an year-to-date basis, which will reduce the contributions from Sky Complex (12% of AUM). Thus, we have trimmed our FY23 DPU forecast by 4%.
Maintain BUY. Our target price for Lendlease REIT of S$1.01 is based on DDM (cost of equity: 6.25%, terminal growth: 1.2%).
See
Catalysts:
- The cap on group size of 10 persons for dining in at F&B establishments was lifted and all employees have been allowed back to their offices since 26 Apr 22. These would increase shopper traffic and tenant sales at 313@Somerset and Jem.
- Reopening of Singapore’s international borders with the vaccinated travel framework (VTF) tourists back to 313@Somerset.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-18

SGX Stock Analyst Report BUY MAINTAIN BUY 1.01 DOWN 1.050