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DBS names Lendlease 'top sector pick' despite retail headwinds

Ng Qi Siang
Ng Qi Siang • 4 min read
DBS names Lendlease 'top sector pick' despite retail headwinds
Despite retail coming under increasing pressure, DBS reckons that Lendlease is poised for resilience.
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SINGAPORE (May 8): Despite commercial real estate investment trusts (REITs) taking a beating from Covid-19 circuit breaker measures, DBS Group Research has maintained its “buy” call on Lendlease Global Commercial REIT (LREIT) as one of its “top sector picks” on grounds of a strong value proposition and resilient asset structure.

While it has been given a global investment mandate, 71.5% of LREIT’s estimated value of $1.4 billion is rooted in Singapore, where it fully owns a 99-year leasehold interest in prime shopping mall 313@somerset. LLGCR also fully owns the Sky Complex, which comprises three commercial office buildings, in Milan, Italy, which constitutes 28.5% of its value. Portfolio occupancy remains steady at 99.8%, with 313@somerset and Sky Complex recording a 99.2% and 100% occupancy rate respectively.

See also: Lendlease Global Commercial REIT posts 3Q DPU of 1.28 cents, 0.7% above forecast.

LREIT’s sponsor, Lendlease Corporation, is part of the established Lendlease Group, which has a long track record of managing commercial assets globally worth A$32.5 billion ($30 billion). It has successfully managed prominent commercial properties including Parkway Parade, Jem and Paya Lebar Quarter in Singapore. These properties in Singapore offer a visible acquisition pipeline for LREIT going forward, potentially increasing the value of the asset.

The REIT recorded strong results in 3QFY20 ending June 30, 2020, with revenue and net profit interest exceeding IPO forecasts by $21.6 million (2.2%) and $16.6 million (4.0%) respectively. The good performance stemmed from higher rental income from 313@somerset and higher contributions from Sky Complex due to a stronger Euro. LREIT’s distribution per Unit (DPU) at $1.28 cents also exceeds initial IPO estimates by 0.7%, with the REIT possessing sufficient liquidity to maintain a 100% payout ratio.

Like all commercial REITS, however, LREIT’s tenants have suffered from reduced tenant sales owing to Covid-19 circuit breaker measures, experiencing a 15-20% y-o-y fall in sales for February and March. While 60% of 313@somerset’s tenants have been considered “essential services” by the Singapore government, only 36% of them are currently operational. Rent reversion may also fall below the 0.6% y-t-d to March 31, government rent rebates and existing security deposits may be able to cover any shortfalls.

“Despite ongoing COVID-19 disruptions, 313@Somerset continued to show resiliency with a historically high tenant retention of more than 90% and low risk of non-renewals in the coming quarter with only 2% of lease expiries. Sky Complex (Milan) continues to benefit from a sticky relationship with tenant Sky Italia, grounded by a triple net master lease expiring in 2032,” says DBS analyst Derek Tan in a Friday report.

Owned by Comcast - the second-largest broadcasting and cable television company in the world - Sky Italia is a major sports broadcaster in Italy, holding the broadcast rights for the domestic top-tier Serie A football league in the football-crazed country. The broadcaster, however, is slowly cutting its channel offerings while its revenues have been hit from a decline in advertising revenues and live sports content following the moratorium on sporting events.

Nonetheless, LREIT is financially resilient, enjoying an existing cash balance of $78.2 million and uncommitted undrawn debt facility of up to $20 million. Its gearing ratio of 35.9% is well within MAS limits (with average cost of debt at 0.86%) while its robust 11.2x interest coverage is one of the strongest within both the retail sector and S-REITS as a whole. The REIT has also postponed non-essential asset enhancements to preserve cash flow amid Covid-19 headwinds.

“LREIT offers investors a visible earnings stream backed by a long weighted average lease expiry (WALE) of 4.9 years by gross rental income (GRI) and 10.4 years by net lettable area (NLA),” Tan continued. “We see zero rental escalations (pegged to ISTAT consumer price index) as a bear-case scenario...Current passing rents are also at a discount to market rents within Sky Complex’s submarket, enhancing tenant stickiness.”

In the long-run, LREIT stands to benefit from the reversion of plot ratio from 4.9+ to 5.6 according to the Urban Redevelopment Authority’s 2019 Master Plan, which could potentially lead to an additional 1,008 square meters of ground floor area being deployed at 313@somerset. The government is also planning a rejuvenation of Orchard Road in the coming years, which could lead to enhanced foot traffic and retail spending at 313@somerset with potential upsides in plot ratio.

Still, the concentrated asset mix of the REIT opens LREIT to significant concentration risks, as a downturn in Singapore or Italy could disproportionately affect asset performance. Yet, the counter’s resilience in spite of the severe Covid-19 outbreaks in both countries is perhaps some cause for optimism.

As of 3.35 pm, LLGCR is trading at $0.58 with a price-to-book (P/B) value of 0.703.

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