CGS-CIMB ups Lendlease REIT’s TP to 90 cents on the back of higher earnings forecasts and lower COE

Felicia Tan
3-min read

The analysts at CGS-CIMB see both organic and inorganic growth opportunities for the REIT.

CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept their “add” call on Lendlease Global Commercial REIT (LREIT) JYEU with a higher target price of 90 cents from 88 cents previously as they see both organic and inorganic growth possibilities for the REIT.

In their March 29 report, the analysts estimate that the REIT’s portfolio valuation could increase by 4.1% y-o-y to $3.7 billion. This is based on increases in the valuations of 313@Somerset, Jem and Sky Complex by 2.1%, 4.4% and 0.2% respectively.

The uplifts can come from rental escalation and indexation, positive reversions and the deployment of the 10,200 sq ft of unutilised gross floor area (GFA) at 313@Somerset, note the analysts.

Without the fair valuation gains, the analysts’ FY2024 gearing of 40.2% for the REIT translates into a debt headroom of $115.8 million, assuming an internal gearing limit of 42%. However, once the increments are factored in, the analysts’ gearing estimate would be lowered to 38.8% from 40.2% for the FY2024. The increase in the REIT’s properties’ valuations would also increase its debt headroom by 92.5%, from $115.8 million to $222.9 million, based on a 42% gearing limit.

The analysts also see the possibility of the REIT acquiring a 12% stake in Paya Lebar Quarter (PLQ) or 40% of its sponsor’s 30% stake in PLQ. This is after the increase in its asset valuation, which should lower its gearing and increase its debt headroom, the analysts note.

The REIT may also be able to acquire its sponsor’s entire 6.1% stake in Parkway Parade, or up to 32% of the entire asset if the other shareholders are willing to divest their stakes, the analysts add.

Further to their report, the analysts have upped their distribution per unit (DPU) estimates by 0.3%, 0.3% and 2.9% for the FY2023, FY2024 and FY2025 respectively as they foresee higher earnings from the REIT and lower cost of equity (COE) of 7.5% from 7.9% previously.

Despite its organic growth potential, the analysts note that LREIT’s unit price has underperformed the Singapore REITs index (FSTREI), falling by 18.1% since March 2022 compared to the index’s 12.9% decline during the same period. According to them, the underperformance is attributed to its adjusted interest coverage ratio (ICR) falling below 2.5x, which caps its gearing at 45% compared to the 50% for Singapore REITs (S-REITs) with adjusted ICRs above 2.5x.

In their view, the lower gearing limit translates into a smaller debt headroom and hampers inorganic growth.

At present, the analysts don’t expect the REIT’s adjusted interest coverage ratio (ICR) to cross the 2.5x mark in the next few years due to the higher cost of debt and perpetual securities secured in this elevated interest rate environment.

“In the meantime, LREIT is trading at [an] attractive 6.6%/6.9% FY2023/FY2024 DPU yields [or] 2.5 standard deviation (s.d.) of [its] historical yield,” the analysts write.

To them, stronger-than-forecasted reversions and accretive acquisitions are re-rating catalysts while weaker-than-expected reversions or leasing rates and a slowdown in consumer spending, which may result in lower gross turnover rents and weaker tenant sentiment, are downside risks.

As at 4.36pm, units in LREIT are trading 0.5 cents lower or 0.74% down at 67.5 cents.

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