Brokers' take: CGS-CIMB positive on Lendlease Reit on potential acquisition

CGS-CIMB in a Tuesday report was positive on Lendlease Global Commercial Real Estate Investment Trust (LReit) after its recent inaugural issuance of perpetual securities, which the research house believes will mainly be used for potentially accretive acquisitions.

In May, the Reit issued S$200 million in perpetual securities at 4.2 per cent per annum, an upsize from its initial transaction of S$150 million with a tightened price from the initial guidance of 4.35 per cent, after strong demand led to oversubscription.

CGS-CIMB analysts Eing Kar Mei and Darren Ong said in the report: "The issuance of perp does not come as a total surprise given the relatively higher cost of equity in LReit, which makes accretive acquisitions difficult."

They believe that the issuance will go towards acquiring a second stake in integrated office and retail development Jem, one of its three right of first refusal assets in Singapore. The Reit had previously acquired a 5 per cent stake in Lendlease Asian Retail Investment Fund 3 Ltd, which holds 75 per cent of Jem.

CGS-CIMB has maintained "add" on LReit, with a raised target price of 86.9 Singapore cents, from 85.8 cents previously.

"Considering the amount of perp securities raised and estimated debt headroom of approximately S$120 million at 40 per cent gearing, we believe LReit could be looking at acquisitions sized S$200 million to S$300 million with gearing likely to be maintained below 40 per cent for acquisition flexibility in the future, Ms Eing and Mr Ong said.

LReit's main intention for that acquisition was to gain pre-emptive rights to increase its strategic stake in the fund over time if other investors were to divest their interests, the analysts added. They also noted that the Reit has no refinancing needs until FY2023.

A drop in shopper traffic and tenant sales due to Singapore's Phase 2 (Heightened Alert) restrictions will impact the performance of LReit's Orchard Road 313@Somerset property, due to its location and the fact that more than a third of the mall's FY20 gross rental income came from food & beverage outlets. Carpark vacancy has also seen a sharp increase.

However, the CGS-CIMB analysts do not expect the impact on the Reit's overall financial performance from potentially weaker-than-expected rental reversion to be substantial, as the leases will be spread out as and when leases are up for renewals.

As at Q3 FY2021, only 6 per cent and 20 per cent of leases by gross rental income were up for renewals in FY2021 and FY2022 respectively. In addition, about 60 per cent of the mall's net lettable area is embedded with annual rental escalations of about 3 per cent.

Rental rebates for its tenants will have a larger impact on the bottomline, the analysts said. "If LREIT gives out one month of rental rebates to all its tenants at 313, our FY2021 DPU (distribution per unit) will fall by 5.8 per cent." However, they added that LReit has not given out any since July 2020.

Furthermore, operational commencement of the Grange Road Carpark event space in 2022, which has brought the Reit many reverse leasing enquiries, will likely help to offset the slower recovery at 313@Somerset.

Units of LReit were trading flat at 76.5 Singapore cents as at 2pm on Wednesday.