Lendlease Global Commercial REIT - CGS-CIMB Research 2023-09-15: Divestment Of Jem Office Could Right The Ship

• Lendlease REIT's share price has fallen ~19% since end-Aug 2023 vs its peers’ average 5% price decline.

Hamstrung by low adjusted interest coverage & 45% max gearing

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• the higher interest rate environment, and
• depressed share price (P/BV of 0.7x as of 13 Sep 2023), which is unfavourable for equity fund raising (EFR).
• While management of Lendlease REIT has ruled out pre-emptive EFR to right the low adjusted ICR and elevated gearing issues, we think the market has nonetheless factored in the risk of EFR as well as the risk of Sky Complex’s master tenant Sky Italia exercising its lease option in May 2026.

Redress of financial metrics likely only from 4QFY24F onwards

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• Based on our scenario analysis, if the divestment of the office component of Jem occurs at the start of FY25F with proceeds used to pare down debt, our FY25F aggregate leverage would fall from ~41% to ~33% while our FY25F adjusted ICR would improve slightly from 2.1x to ~2.5-2.6x. Meanwhile, FY25F DPU would improve slightly by 5.7%.
• While redemption of its S$200m perpetuals @ 5.25% will only be possible on its call date 11 Apr 2025, if Lendlease REIT purchases S$150m of its 5.25% perps on the secondary market by end-FY24F, we estimate this would lift FY25F DPU by ~4.5%. However, gearing would reach 45% and adjusted ICR would only improve slightly, from 2.1x to 2.2x, after which Lendlease REIT could pare down borrowings with divestment proceeds from the sale of Jem offices in 4QFY24F/1HFY25F, in our view.

FY24F distribution yield of 7.9% at +1.9 standard deviation of 5-year historical average

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Natalie ONG CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2023-09-15 SGinvestors.io

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