Brokers’ take: Citi downgrades highly-geared Lendlease Global Reit to ‘neutral’
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Michelle Zhu
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CITI Research downgraded its call on Lendlease Global Commercial Real Estate Investment Trust ( Lendlease Global Reit ) to “neutral” from “buy” in view of rising capital management concerns and valuations pricing in a potential equity fundraising.
After shaving its distribution per unit (DPU) estimates for FY2024 to FY2025 to account for higher debt costs and delays in completion of the Reit’s multifunctional space, the research house now has a lower price target of S$0.61 compared to S$0.78 previously.
The new target also implies a higher discount rate resulting from higher gearing and benign DPU growth, along with an increased portfolio cap rate, said analyst Brandon Lee on Sunday (Aug 27).
He highlighted that the Reit’s implied capitalisation rate of about 5.8 per cent stands higher than its portfolio’s 4.5 per cent cap rate. Its price-to-book valuation of 0.75 times stands much lower than its pre-Covid and long-term mean ratios, in his view.
“Therefore, we think the market could be pricing in some form of equity fund-raising due to (Lendlease Global Reit’s) high gearing,” said the analyst.
Lendlease Global Reit’s latest gearing of 40.6 per cent for Q4 represents its highest since listing, noted Lee.
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He estimates a look-through gearing of 50.5 per cent, which makes it the highest-geared Singapore-listed Reit (S-Reit) under Citi’s coverage.
Based on the analyst’s projections, equity requirements of S$500 million to S$600 million will be required to attain a desired look-through gearing of 35 to 38 per cent, which would result in a lower pro forma net asset value per share.
Though the Reit could also potentially sell its sole non-domestic asset Sky Complex to improve its headline and look-through gearing, Lee cautioned of a challenging transactions market in Europe due to high interest rates.
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“While we do not see near-term risk of Singapore retail cap rate expansion, we understand investors typically remain wary of higher-geared S-Reits in a rising interest rate climate.”
Lendlease Global Reit, which counts 313@Somerset among its portfolio investments in Singapore, has an adjusted interest coverage ratio (ICR) of two times. This also represents the lowest ICR among Citi’s covered S-Reits, said Lee, with FY2024’s projected ICR slightly lower at 1.8 times.
Units of Lendlease Commercial were up S$0.005 or 0.9 per cent at S$0.595 as at the midday trading break on Monday.
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