DBS Group Research analysts Geraldine Wong and Derek Tan have kept “buy” on Lendlease Global Commercial REIT (LREIT) with a higher target price of $1.05 from 90 cents previously.
To the analysts, the acquisition of JEM – which may happen within a year – proves to be an impending catalyst for the REIT.
“We believe that a golden opportunity exists for LREIT to fully acquire [the] JEM mixed development within the coming year. A dominant mall in the West, we see positives from a pivot into the suburban retail space while its Singapore exposure will increase to 85% (from 75%) as LREIT emerges as the upcoming Singapore-focused retail play,” they write in a Sept 2 report.
To the analysts, LREIT has the capacity to “digest JEM accretively” with an optimal capital ratio of 75% equity and 25% perpetual securities.
The ratio will bring accretion of 0.9% while keeping gearing at less than 40%.
“The inclusion of debt will bring gearing a tad higher to 42% and accretion may rise to 6.0%,” they write.
According to the analysts, LREIT is structured to weather storms, with [email protected] in Orchard Road continuing to show resiliency with a high tenant retention of above 80% maintained.
The mall has also churned a surprise value appreciation amid Covid-19.
LREIT’s lease for Sky Complex in Italy remains “rock solid” with a 12-year triple net master lease expiring in 2032.
Finally, the inclusion of LREIT to the FTSE EPRA Nareit Global Developed Index will be another catalyst to re-rate the stock, which the analysts believe will drive cost of equity lower.
To Wong and Tan, the REIT’s inclusion “might be the long-awaited catalyst to push LREIT’s share price beyond the IPO threshold of 88 cents and higher”.
The manager of LREIT announced, after the close of market trading on Sept 2, that the REIT will be included in the index with effect from Sept 17.
“This is a significant milestone for LREIT and a testament towards our commitment in achieving long-term growth and value for our unitholders. It highlights LREIT’s resilience despite the current challenges in the macro economy,” says Kelvin Chow, CEO of the manager.
“Being part of this leading benchmark will further enhance LREIT’s visibility to index funds, and support liquidity and capital raising. We remain committed to generate long-term value for our unitholders as we continue to grow responsibly and plan the way ahead,” Chow adds in a Sept 2 statement.
Units in LREIT closed 2.5 cents higher or 2.81% up at 91.5 cents on Sept 2, with an FY2022 P/NAV of 1.1 times and distribution yield of 5.5%.