Orchard rents at an inflexion point
- 1H22 DPU of 2.40 Scts trends behind estimates
- Eyes peeled for JEM acquisition which will be next on the books with inorganic DPU growth potential
- Softer rent recovery profile at 313@Somerset with anticipation of full rent recovery in FY24, albeit recovery in underlying operating metrics
- Lower TP to S$1.06; Decent forward yield of 5.6% on current levels with compelling 8% growth in DPU
Investment Thesis
Aimed for the bull’s eye – full control of JEM may happen within a year. We believe that a golden opportunity exists for LREIT to fully acquire 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 SG exposure will increase to 85% (vs 75%) as LREIT emerges as the upcoming Singapore-focused retail play.
An optimal capital structure to drive accretion. We believe that LREIT can digest JEM accretively and our optimal capital structure is to use 75% equity and 25% perpetual securities, bringing accretion of c.0.9% while keeping gearing at an optimal <40%. The inclusion of debt will bring gearing a tad higher to 42%, and accretion may rise to c.6.0%.
Central rents at an inflexion point. Central passing rents continue to be at an inflexion point alongside staggered lease renewals. Bulk of lease expiries in FY23 (c.42% of 313@Somerset by GRI) could be the pulling factor for a sharper normalization in rents in the coming results, which we anticipate full recovery back to above S$18 psf pm by end FY24 while maintaining current positive reversion rents close to c.+10%.
Valuation:
Maintain BUY, TP S$ 1.06. Our discounted cash flow valuation factors in (i) 2.0% risk free rate, (ii) 1.0 beta, (iii) 6.31% WACC, and (iv) 2.0% terminal growth to derive a target price of S$1.06.
Where we differ:
Structured to weather storms. 313@Somerset continues to show resiliency with high tenant retention of c.80% maintained. The Sky Complex lease remains rock solid with a 12-year triple net master lease expiring in 2032.
Key Risks to Our View:
Key risks to our view include the threat of a second wave of COVID-19 in Singapore.