Recent sell-down in Lendlease Global Commercial REIT ‘unwarranted’, says DBS

DBS has kept its "buy" call and target price of 90 cents on the REIT.

The recent sell-down in the units of Lendlease Global Commercial REIT (LREIT) JYEU has been “unwarranted”, write DBS Group Research analysts Geraldine Wong and Derek Tan.

LREIT’s unit price has been falling steadily after the REIT’s released its results for the FY2023 ended June on Aug 7. Since then, units in the REIT have fallen by around 17.91% to 54.5 cents as at the close of Sept 12.

However, Wong and Tan are remaining upbeat about the REIT’s prospects. In their Sept 11 report, the analysts have kept their “buy” call and target price of 90 cents, which represents an upside of 65% to the REIT’s last-closed price of 54.5 cents.

“LREIT has underperformed its retail focused Singapore REIT (S-REIT) peers lately, with its share price weakening by close to 15% while its peers have declined only around 3%,” the analysts write. “This is despite the REIT building more resilience and growth via its acquisitions of JEM mall (in February 2022) and a 10% stake in Parkway Parade Mall in June 2023.”

“With these strategic acquisitions, LREIT’s earnings are more diversified and defensive in our view and the pivot to Singapore is a strong strategic move,” they add.

Following the REIT’s strategic pivot to Singapore, the REIT’s assets within the country now make up 88% of its total assets, mainly from the retail space. “We expect the REIT to deliver stable returns in the coming years,” write the analysts.

At present, the REIT is now trading at an FY2024 yield of 8.2%, which is an opportunity “not to be missed”.

The REIT, which is also trading at a P/B of around 0.7x and -1 standard deviation (s.d.) of its historical mean means it is providing “attractive returns for an emerging suburban landlord”. However, this may imply expectations of a “significant cut” in its distribution per unit (DPUs), add the analysts.

That said, they remain optimistic about the REIT’s future performance, seeing its ebitda to grow at a compound annual growth rate (CAGR) of 7% in FY2023 to FY2025. This is due to the further rental reversion upside for the REIT’s key assets, 313@Somerset and JEM.

“We expect these properties to see positive rental reversions of 5% - 15% in coming years, underpinned by strong tenant sales exceeding pre-Covid levels by 15%,” write Wong and Tan.

“In addition, LREIT will see a boost from [the] acquisition of a 10% stake in Parkway Parade, and rental escalations from Sky Complex [in Milan],” they add.

At this price, the analysts see that an equity fund raising is unlikely to happen, given the REIT’s “stable financial metrics and strong lender support”. This also implies that the pressure to reduce its gearing is lower than the market’s perception.

Instead, the analysts envision the REIT conducting an asset sale or JEM Tower or Sky Complex, Milan, which could reduce the REIT’s gearing to 32% with minimal dilution to its DPU.

Overall, the analysts reiterate that the recent sell-off is unmerited. “We see significant value emerging, with concerns over LREIT’s balance sheet overblown,” they write.

As at 12.27pm, units in LREIT are trading flat at 54.5 cents.

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