Lendlease Global Commercial REIT (LREIT SP)

🏢 Lendlease Global Commercial REIT (LREIT SP) – Gearing to Decrease with Jem Office Sale

Recommendation: ADD
Target Price: S$0.71
Stop Loss: Not specified
Date of Recommendation: 5th September 2024
Broker: CGS-CIMB Securities

Investment Thesis: Lendlease Global Commercial REIT – A Strategic Play on Lower Gearing and Strong Rental Growth

Lendlease Global Commercial REIT (LREIT) is positioning itself for growth by divesting the Jem office property, which will reduce its gearing and provide financial flexibility to capture future opportunities. With strong occupancy rates at key properties like 313@Somerset and Jem, LREIT is poised to benefit from stable rental reversion trends.

• Divestment of Jem Office:
  LREIT has received multiple enquiries and provided viewings for its Jem office in Jurong East. The divestment is estimated to yield S$440 million to S$470 million, which will be used to pare down S$360 million in loans maturing in FY25. This will lower the gearing from 40.9% to around 35%, restoring LREIT’s inorganic growth potential and allowing it to take advantage of falling interest rates.
• Impact on Distribution per Unit (DPU):
  The sale of the Jem office is expected to have a minor negative impact on FY25F DPU (-2.8%) due to a slight increase in borrowing costs. However, FY26F DPU is projected to increase by 8.8%, reflecting the benefits of lower interest expenses as loans are paid down.
• Gearing and Debt Headroom:
  Post-divestment, LREIT’s gearing will decrease to around 35%, with debt headroom improving to S$328 million at 40% gearing and S$668 million at 45%. This will provide LREIT with flexibility to acquire positive carry assets and further improve its balance sheet.

Valuation and Financials:
LREIT is trading at an attractive forward FY25F DPU yield of 6.6%, which we believe is undervalued considering its growth potential. Despite a slight reduction in FY25F DPS (2.4% reduction), the long-term outlook remains positive, supported by improvements in financial metrics and the potential for acquisitions.

Share Price Catalysts:

• Divestment of Jem and other strategic assets to reduce gearing.
• Positive rental reversion trends at 313@Somerset and Jem.
• Improvements in financial metrics, leading to a potential re-rating of the stock.Thank you