Lendlease REIT – Ingesting The Acquisition Of Jem

Excerpts from UOB KayHian report

Lendlease Global Commercial REIT (SGX: JYEU)

• Lendlease Reit 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.
• LREIT 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.
• LREIT provides an attractive FY23 distribution yield of 7%.

Maintain BUY. Target price: S$1.05.

Lendlease REIT (LREIT) provided a business update for 3QFY22

313@Somerset maintained positive reversion. Portfolio occupancy was stable at 99.9% in 3QFY22. Occupancy at 313@Somerset eased slightly by 0.3ppt qoq 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.

Lendlease Reit 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. LREIT 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: Benefitting from higher inflation

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.

Healthy balance sheet

LREIT has low aggregate leverage of 27.7% as of Mar 22. Aggregate leverage would increase to 40.7% after completing the acquisition of 68.2% stake in Jem in Apr 22. Management estimates that weighted cost of debt will increase from current 0.98% to 1.2% after the issuance of sustainability-linked loan of S$860m to finance the acquisition. LREIT has sufficient bank facilities to refinance debt due in FY23. 90% of the borrowings are hedged to fixed rates.

Jem: Enhancing scale in home base Singapore

LREIT 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%, LREIT is able to generate recurrent savings of S$5.6m per year from tax transparency.

VALUATION/RECOMMENDATION

Maintain BUY. Our target price of S$1.05 is based on DDM (cost of equity: 6.25% (previous: 6.0%), terminal growth: 1.2%). 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 Framework, which commenced in Apr 22, bringing tourists back to shop at Orchard Road. You can view the company website here and find the full report here