DBS Group Research (DBS) analysts Geraldine Wong and Derek Tan have kept their “buy” call on Lendlease Global Commercial REIT (LREIT) at a lowered target price (TP) of 75 cents from 90 cents previously.
Following the results of the REIT’s 1HFY2025 ended December 2024 results, Wong and Tan expect its Singapore assets to continue to be the key driver of distribution per unit (DPU), with the expectation of strong rental reversions in the range of a high single-digit or above for both office and retail lease renewals in FY2025.
“1HFY2025 DPU decreased by a corresponding 14.3% y-o-y to 1.80 cents, representing around 50% of our full-year estimates but falling below consensus estimates of 3.90 cents for FY2025,” write the analysts in their Feb 5 report.
In the period, portfolio occupancy remained stable at 92.3%, with rental reversions of 10.7% for retail leases and a 1.2% rental uplift for the inflation-pegged Sky Italia lease at Sky Complex buildings 1 and 2.
Tenant sales at Singapore malls declined 5.2% y-o-y in the second half of 2024, driven by strong outbound travel among locals. LREIT also announced the commencement of the Grange Carpark redevelopment, scheduled for completion in 2HFY2026.
Meanwhile, gearing remained flat at 40.8%, with a 17 basis point (bps) q-o-q reduction in average borrowing costs to 3.57%, and the fixed hedge ratio remained unchanged at approximately 70% of the REIT’s total loan book.
Wong and Tan write: “Adjusted interest coverage ratio (ICR) for the period declined 10 bps q-o-q to 1.5 times and comes close to the statutory threshold in place for S-REITs, but ICR ratio for bank covenants at 2.7 times should be well-buffered.”
Regarding capital management, they add that LREIT’s managers have secured loan facilities to refinance the remaining $360 million in debt due in FY2025 and approximately $200 million in debt maturing in September.
“We are monitoring the potential reset of April 2025 perpetuals, given the higher Singapore overnight rate average (SORA) benchmark. Valuations are undemanding at 0.7 times price-to-book and forward FY2025 yields of 6.6%,” continue Wong and Tan.
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Meanwhile, the completion of the lease restructuring at LREIT’s Sky Complex Building 3 is expected to provide a boost as revenue from the asset stabilises at around EUR30 million ($42.1 million) per annum, a 20% uplift.
“Supplementary rents totalling EUR10 million across two years are anticipated to buffer any impact to DPUs from temporary occupancy losses at Sky Complex Building 3. Breakeven occupancy at the tower is estimated at 60% to 70%.”
Wong and Tan also see that divestment of JEM office is a prominent catalyst for a re-rating of the stock, which they believe is the key to strengthening LREIT’s balance sheet.
They note that buyer prospects for JEM have improved in recent quarters following the sale of Mapletree Anson, combined with easing interest rates.
“The divestment of the JEM office at a 3.5% cap rate will generate around $450 million in proceeds. These funds can be used for debt reduction ahead of the April perpetual redemption, while also being yield accretive to our DPUs,” write Wong and Tan.
The analysts’ TP accounts for lowered net property income (NPI) margins in Singapore on the back of inflationary pressures, alongside another estimated 20 bps increase in average borrowing cost in FY2025 to fully reflect LREIT’s true Euro loan rates.
One key risk noted by the pair is the REIT’s “stretched” balance sheet, with adjusted interest cover ratio dipping to 1.5 times in the quarter ending December 2024.
As at 4.22 pm, units in LREIT were trading 0.5 cents higher or 0.96% up at 52.5 cents.
