Brokers' take: UOBKH and CGS-CIMB positive on Lendlease Reit's acquisition of Jem

UOB Kay Hian (UOBKH) and CGS-CIMB are positive on Lendlease Global Commercial Reit's (LReit) acquisition of the remaining interest in Jem mall it did not yet own.

This comes after the real estate investment trust (Reit) proposed to acquire the remaining 68.2 per cent stake in the prime Jurong property for a value of S$2.08 billion on Feb 15.

In a research report on Wednesday (Feb 16), UOBKH maintained its "buy" call on the Reit and increased its target price to S$1.08 from S$1.03. This comes after the research house raised terminal growth expectations for LReit by 0.2 per cent to 1.2 per cent, from 1 per cent previously.

UOBKH analyst Jonathan Koh said the acquisition "squeezes out" yield accretion, bringing expected H1 FY2022 DPU up by 3.6 per cent.

He is of the opinion that LReit will become more diversified and strong with the acquisition of Jem, as "resilient and defensive" suburban retail will account for 46.8 per cent of the portfolio, up from 16.3 per cent previously.

With the acquisition, the Reit will be more exposed to essential services and non-discretionary trade - rising to 59 per cent from 52 per cent of gross rental income, he added.

By owning 100 per cent of Jem, LReit will also benefit from tax transparency and be able to generate tax savings of S$5.6 million per year, Koh said.

The analyst said it is possible for LReit to have a higher weightage in the FTSE EPRA Nareit Developed Asia Index as well due to a larger market cap, free float and higher trading liquidity.

Likewise, CGS-CIMB said in a separate research report on Wednesday that the acquisition is accretive.

The research house expects the deal with Jem to enhance LReit's income stability via diversification and higher exposure in the suburban retail sector.

CGS-CIMB highlighted that it likes Jem due to its position as one of the largest suburban malls in Singapore with 100 per cent committed occupancy and its strong catchment from surrounding residential areas and future developments. It also noted the mall's resilience despite impact from the pandemic.

The brokerage maintained its "add" call on the Reit but lowered its target price to S$0.954 from S$0.956 previously.

The change in target price comes after CGS-CIMB lowered expected DPU for FY2022-24 by 2.2 per cent due to the higher base effect and lowered income assumptions for another LReit asset, Grange Road carpark.

The research house also raised the cost of equity assumptions given the rising rate environment.

Units of LReit were trading at S$0.835, down 0.6 per cent or S$0.005 as at 2.19 pm on Wednesday.