Lendlease Global Commercial REIT - DBS Research 2022-08-22: Standing Amongst The Retail Titans; A Growing Singapore-Centric Retail Play

Lendlease Global Commercial REIT - Standing Amongst The Retail Titans; A Growing Singapore-Centric Retail Play

  • Lendlease REIT had announced the acquisition of the remaining stakes of the mixed development JEM back in February 2022. The deal stands as the largest suburban retail transactions this year at a deal size of S$2,079m.
  • With Lendlease REIT (SGX:JYEU)’s first major milestone to fully acquire JEM under its belt, the value of investment properties has more than doubled from ~S$1.4b to S$3.6b over the span of 1.5 years.

JEM to deliver multi-faceted benefits to Lendlease REIT’s overall portfolio.

  • We see JEM complimenting Lendlease REIT’s overall portfolio in multiple ways. JEM is one of the most established and dominant malls in Singapore’s west and enjoys excellent transport connectivity located next to Jurong East MRT, a key transit station. The addition of JEM’s tenant mix to the overall portfolio will carve out new trade sectors within the necessity spending space including supermarkets and home furnishing.
  • Rental income from suburban retail will now make up close to half (46.8% by portfolio valuation) of Lendlease REIT's revenue as a newly carved out income stream. Suburban tenant mix will also add new trade sectors to Lendlease REIT’s retail portfolio to compliment 313@Somerset’s exposure, especially within the necessity spending space.

Distributable income to almost double on more diversified sources of income.

  • On a pro-forma 1H22 basis, Lendlease REIT's NPI with the inclusion of JEM will more than double from S$29.6m to S$72.1m (including one-off impact due to COVID arising from rental rebates and discounts).
  • Distributable income will almost double from S$28.6m to S$57.2m for the same period. Lendlease REIT’s FY22 results exceeded our full year expectations with JEM’s acquisition delivering one quarter worth of rental contribution for the full year.
  • We continue to expect further rental upside from JEM in FY23F primarily from higher reversionary rents, ancillary income and further NLA optimization within JEM retail.

24-year office WALE under JEM to support income for the portfolio.

  • JEM’s office component also paints a familiar picture to Lendlease REIT’s Sky Complex, a master-leased office asset in Milan. The office component of JEM is fully leased to the Ministry of National Development of Singapore (MND) on a long WALE of 24 years, a solid tenant to have in one’s portfolio. Portfolio portion of stable income will increase from the previous ~23.5% (including 31.8% ownership stake in JEM) to 24.9%.

Singapore-centric strategy sets Lendlease REIT apart from peers.

  • Lendlease REIT’s acquisition of JEM leapfrogs the REIT in terms of AUM and liquidity. Suburban retail sector’s contribution to Lendlease REIT’s portfolio will increase to 46.8% with a Singapore–centric asset base of ~88% by portfolio valuation.
  • Lendlease REIT’s growth trajectory continues to stand out from peers due to its Singapore centric strategy. Amongst the retail S-REITs, Lendlease REIT is one of the few that has a strong acquisition growth strategy with ample sponsor assets within Singapore, especially within the tightly held Singapore retail landscape.

Strong contender within the retail S-REITs space.

Smaller stakes in sizeable ROFR assets to come.

  • Future ROFR assets that Lendlease REIT has first-bite include sizeable developments Paya Lebar Quarters and Parkway Parade Mall, with similar dominant characteristics as JEM’s mixed development in their respective catchment areas. With full ownership of JEM under its belts this year, we do not envision another major acquisition in the works this year, as management focuses on digesting and extracting value from JEM.
  • Looking back at JEM’s acquisition strategy, we believe Lendlease REIT will look to acquire small entry stakes in sponsor assets over time. Sponsor Lendlease Group owns a 6.1% stake in Parkway Parade mall via Parkway Parade Partnership Limited and 30% interest in Paya Lebar Quarter mixed development.

Further narrowing of yield premium over time as market appreciates Lendlease REIT’s expanded value proposition.

Mercatus portfolio strengthens cap rates for suburban retail.

  • Recent news of the proposed divestment of Mercatus portfolio should support the tight cap rates we have seen for the Singapore retail sector. Mercatus is looking to divest its stake in four dominant suburban retail malls in Singapore - AMK Hub, Jurong Point, NEX and Swing By @ Thomson Plaza - for a reported quantum of ~S$4.0bn.
  • The Mercatus portfolio reflects the performance of suburban malls held within the listed landlord space including JEM, with operational performance rebounding to ~96% of pre-COVID levels in FY21, and potentially exceeding that this year.

Singapore malls – few to come with heftier price tags.

  • The Mercatus deal has attracted the eyes of real estate titans both locally and regionally, putting the portfolio’s cap rate low at 4.3% - 4.4%, versus Lendlease REIT’s JEM deal (4.4% cap) and Frasers Centrepoint Trust’s PGIM portfolio deal (4.8% - 5.0% cap).

Valuation held up by tight cap rates and improving fundamentals.

  • On a full year basis, Lendlease REIT’s valuation has risen 2.5% y-o-y to S$3.6bn, with JEM seeing a valuation uplift of 2.3% y-o-y and 313@Somerset’s valuation increasing 0.5% y-o-y. Cap rates remained stable on a y-o-y basis at 4.25% to 4.50%, unscathed in a hawkish interest rate environment. We expect recovery in underlying rents to continue to support valuations.

Closing in on rental gap as sentiment shifts towards the landlords market.

  • We believe that there is further room for recovery in passing rents for 313@Somerset as tenant sales had finally reached an inflexion point in 4Q FY22 (quarter ending Jun’22), surging past pre-COVID levels.
  • Occupancy cost remains ~20% below pre-COVID levels as tenants continue to benefit from lower rents contracted since the pandemic. We estimate that passing rents at 313@Somerset was S$15.50 - S$16.00 psf pm in 2HFY22, representing a 10-15% discount to passing rents in 2019 at approximately S$17.80, implying further room to yield up.

Higher target price for Lendlease REIT with JEM in numbers.

  • We have factored in JEM’s acquisition within our model while rolling forward numbers into FY23. DPU estimates for FY23 / FY24 of 5.1 / 5.3 cents for Lendlease REIT translates to a forward yield of 6.1% / 6.4% respectively.
  • Further rental upside at 313@Somerset and JEM are not priced in with 313@Somerset prime retail units changing hands above current passing rents and additional rental from Ikea at JEM. We have delayed our assumption of Grange Carpark completion to the start of 2024.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-08-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.10 UP 1.050

Previous report by DBS Research:
2021-09-02 Lendlease Global Commercial REIT - JEM Acquisition An Impending Catalyst

Target prices by 2 other brokers at Lendlease REIT Target Prices.
Listing of broker reports at Lendlease REIT Analyst Report.

Relevant links:
Lendlease REIT Share Price History,
Lendlease REIT Announcements,
Lendlease REIT Dividends & Corp Actions,
Lendlease REIT News Articles


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