Lendlease Global Commercial Reit

Excerpts from CGSCIMB report

Lendlease Global Commercial Reit (SGX: JYEU)

• Recovery in tenant sales outstripping market
• 2H/FY22 DPU of 2.45/4.85 Scts were in line at 51%/102% of our FY22F.
• Portfolio occupancy was high at 99.8% with more organic growth expected.

Reiterate Add with lower DDM-based TP of S$1.02.

Lendlease Global Commercial Reit FY22 earnings lifted by acquisition of Jem and strong reopening

Lendlease Global Commercial (LREIT) Reit FY22 revenue/NPI grew by 29.3%/32.7% yoy to S$101.7m/S$75.5m, boosted by the accretive acquisition of Jem and better operating performance at 313@somerset. Consequently, DI/DPU grew by 29.7%/3.6% yoy. FY22 NPI margins improved yoy from 72.4% to 74.3% and are expected to remain at this normalised level. Tenant sales are c.15-18% above pre-COVID levels vs. market's 10%. We understand that 313@somerset has achieved higher pre-COVID sales level compared to Jem, lifted by returning tourists.

Organic growth on retail recovery and inflation-linked escalation

313@somerset and Jem have maintained high occupancy of 99.9% and 99.5%, respectively. FY22 reversions for 313@somerset and Jem have been positive, with the former coming in at 3.6%. Going forward, we expect demand for these two well located, dominant malls to persist, keeping occupancy high. Portfolio valuation gained 2.5% yoy, attributable to uplift in market rents and improved market outlook while cap rates remain stable. Occupancy cost increased by 7-8% on the back of positive reversions, but remain c.10-15% below pre-COVID levels, implying more room for rental growth. Meanwhile, annual escalation for Sky Complex are based on 75% of Italy’s CPI growth, which increased 6.8% yoy in May 22. Impact from rising electricity rates is mitigated by fixed-rate electricity contracts, which will run until end-FY23 (Jun 23) while the master leasee is responsible for Sky Complex’s utility expenses under the triple-net lease structure.

Gearing still comfortable; more interest rate hedging expected

Post-acquisition of JEM, cost of debt jumped qoq from 0.98% to 1.69% while interest rate hedge declined from 90% to 59%. EUR loans account for 28% of total borrowings. 100%/43% of EUR/SGD loans have been hedged. Going forward, management intends to increase interest rate hedge. Gearing remains slightly elevated at 40%, but well within MAS's 50% gearing limit, mitigated by robust ICR of 9.2x. LREIT employs a 12-month rolling FX hedge and its blended hedge rate on EUR is 1.56 (vs. spot rate of 1.40).

Valuation/Recommendation

Reiterate Add with a lower DDM-based TP of S$1.02. FY23-24F DPU estimates lowered by 3.9-4.1% as higher revenue assumptions were wiped out by higher borrowing assumptions. Acquisition of Jem has strengthened LREIT’s portfolio, increasing market capitalisation/deposited property by 1.8x/2.1x to S$1.8bn/S$3.7bn, respectively. We expect organic growth on the back of positive reversions as well as the unlocking of c.10k sqft or 3.5% of untapped GFA at 313@somerset. LREIT’s pipeline assets include Parkway Parade and Paya Lebar Quarter, the latter could be acquired in tranches due to its strata title. Lendlease Reit share price chartYou can find the full report here and the company website here