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DBS lowers Lendlease Global Commercial REIT’s TP to 90 cents on higher interest rates and forex risk

Douglas Toh
·4-min read

The brokerage has kept its ‘buy’ call, however, as it sees the REIT as a ‘hidden gem’.

DBS Group Research’s analysts Geraldine Wong and Derek Tan have kept their “buy” call on Lendlease Global Commercial REIT (LREIT) JYEU after the REIT posted its results for the FY2023 ended June.

For the FY2023, LREIT posted a distribution per unit (DPU) of 4.70 cents, down 3.2% y-o-y, and below Wong and Tan’s full-year DPU estimate of 4.89 cents. The lower-than-estimated DPU was due to higher interest rates and foreign exchange (forex) losses from the REIT’s Italian property, Sky Complex.

On this, the analysts have lowered their target price to 90 cents from $1.08 previously as they factor in higher interest rates and forex.

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“We roll forward our valuations into FY2024 while changing our forward estimates to take into account a 50 basis point (bps) increase in interest rate estimates for both FY2024/FY2025 to 3.50%, as per management guidance; the foreign translation headwinds that will affect Sky Complex’s income; and income contribution from the 10% stake in the Parkway Parade holding entity,” write Wong and Tan in their Aug 10 report.

The target price is based on a discounted cash flow-based model, with a 3.5% risk free-rate and 6.38% weighted average cost of capital (WACC).

The analysts have also lowered their DPU estimates for FY2024 and FY2025 to 4.4 cents and 4.5 cents respectively, down from 5.0 cents and 5.1 cents previously. The new DPU estimates translate to forward yields of 6.5% and 6.8% respectively on LREIT’s current share price of 67.5 cents as at the close of Aug 8.

Despite the DPU miss, Wong and Tan are positive on LREIT’s “strong” occupancy rate, which is close to 100% across all three of its properties. LREIT’s reversions for the FY2023 were also “robust” for its retail and office segments, which came in at a positive 4.8% and 5.9% respectively.

In FY2024, the analysts see the REIT’s retail malls, 313@Somerset and Jem, to lead its earnings growth as they expect tourist arrivals to be strong during the year.

Notably, 313@Somerset has been the first Singapore REIT (S-REIT) mall within the Orchard precinct to post a recovery of tenant sales to match pre-Covid levels and the first to show positive rental reversions.

“We understand passing rents are currently in the range of $15 to $16 psf per month, as opposed to pre-Covid levels that were generally close to $18 to $19 psf per month, which sets the guidance for the path to recovery for passing rents at the mall over the coming years,” say Wong and Tan.

The REIT’s “healthy” occupancy cost - which is below pre-Covid-19 levels at 15% to 18%, will mean “higher bargaining power on reversionary rents”.

“We anticipate higher gross turnover (GTO) rental benching on record-high sales, moderation of passing rents to match FY2019 levels, and easing cost pressures to drive higher margins for the retail business going into FY2024,” say Wong and Tan.

“Based on our previous retail sector update, we believe that reversions in the range of +5 could be very well-sustained over the coming years, given that retail sector rents are currently about 5% to 10% below normalised levels on a passing rent basis,” they add.

Wong and Tan are hopeful that the stronger visibility of catalysts going into FY2024, including tourist footfall returns alongside record-low occupancy cost, will mean strong reversions in the single-digit range can be well maintained into FY2024.

When it comes to capital management, the REIT’s interest cost as at June 30 stood at 2.69% with a gearing ratio of 40.6%, which is at the higher end of the range, compared to the average rate of 36% amongst the retail S-REITs.

The analysts highlight that LREIT will transition into its new Euro-denominated loan facility from the next quarter, to refinance the EUR285 million ($422 million) loan due for expiry in FY2024.

This will stand as the only loan that is up for renewal for FY2024, representing close to a third of the group’s total borrowings.

Wong and Tan understand that LREIT expects all-in interest cost to land in the mid-3%, from the current 2.69%, or close to an approximate 80 bps increase in average cost.

“While the operational recovery trajectory is well within our expectations, interest cost will see an approximate 80 bps increase going into FY2024, mitigated by the early refinancings of all outstanding debt expiries for FY24. Our sensitivity analysis shows that a one percentage point (ppt) increase in LREIT’s average interest cost will have a negative 12% impact on forward DPUs,” opine the analysts.

As at 4.50pm, units in LREIT are trading 0.5 cents lower, or 0.75% down at 66 cents on Aug 11.

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