Acquiring the remaining stake in Jem
? LREIT is acquiring the remaining 68.2% stake in Jem for S$1.42bn.
? We expect the accretive acquisition to enhance its income stability via diversification and higher exposure in suburban retail sector.
? Future acquisition focus remains in Singapore. Reiterate Add.
An accretive acquisition; enhancing portfolio resilience
Lendlease Global Commercial Trust (LREIT) is acquiring the remaining interest in Jem for a total acquisition cost of S$2,015m (based on 100% stake), increasing its stake in Jem from 31.8% to 100%. The acquisition is expected to be completed by 15 May 2022. Based on the purchase consideration of S$1.42bn, the acquisition yield works out to be 4%/4.4% (with/without the effects of Covid-19 related one-off abatements and expected credit loss) and 0.3% discount to the property’s independent appraised value. Based on 1HFY22 pro forma financial performance, the acquisition is 0.1% to 3.6% DPU accretive, depending on whether the effect of one-off Covid-19 impact is included (+6.8% to +10.5% based on 100% stake). Post-acquisition, LREIT’s total portfolio NLA will increase by 70% to c.2.2m sq ft and WALE will increase from 8.4 years to 8.9 years by NLA. LREIT’s portfolio value will also increase by 2.1x to c.S$3.6bn while exposure to the more resilient suburban retail sector will increase from 16.3% to 46.8%. Post-acquisition, LREIT will be the 16th largest SREIT by portfolio value, up from 33rd.
A mixed suburban property with resilient cash flow
The acquisition, while expected, came in earlier than anticipated. We like Jem as it is one of the largest suburban malls in Singapore with 100% committed occupancy and enjoys strong catchment from the surrounding residential area and future developments. We understand that the mall remained resilient despite Covid-19 impact. It is a mixed development with the office component fully leased to Singapore’s Ministry of National Development on a 30-year lease with rent reviews every 5 years, which provides cash flow stability. The acquisition would also allow Jem to enjoy tax transparency.
Funding with equity and debt
LREIT intends to fund the acquisition via equity fund raising, promissory notes issued to one of the property vendors, debt and/or issuance of perpetual bonds as well as internally generated cash. Pro-forma gearing is expected to increase to 40.7%. An extraordinary general meeting will be held on 7 Mar 2022 at 10am. On future acquisitions, LREIT plans to focus on Singapore with Paya Lebar Quarter and Parkway Parade in the pipeline.
Reiterate Add with a lower DDM-based TP of S$0.954
Despite the accretion acquisition, we adjust our FY22-FY24F DPU by -2.2% to +0.6% due to the higher base effect and as we took the opportunity to lower our income assumptions for Grange Road Carpark. We also raise our COE assumptions given the rising rate environment. Upside/downside risks include accretive acquisitions/weaker rental income.