Lendlease Global Commercial REIT – Delivering a JEM as promised

23 Feb 2022

Proposed acquisition of the remaining 68.15% stake in JEM is marginally accretive at 0.1% and will double LREIT’s AUM and market capitalisation, increasing its visibility and investor relevance.
Strong tenant demand from JEM’s dominant positioning in the Jurong East catchment and stable income from the office component will help to anchor LREIT’s portfolio, forming 58% of FY23e NPI.
Maintain ACCUMULATE and DDM TP of S$0.94. We tweak our forecast to incorporate the acquisition of the remaining 68.15% stake in JEM. FY22e/23e DPUs have been increased by 1.7%/0.3% while FY24-26e DPUs were lowered by 0.4-1.1% due to the enlarged share base. The current share price implies FY22e DPU yields of 6.0%.

What’s New?

Proposed acquisition of the remaining 86.15% stake in JEM. JEM is a suburban integrated development located in Jurong East with a total NLA of 892,502 sq ft. The six-storey retail mall accounts 65.1% of NLA with the remaining 34.9% in a 12-storey Grade A office space which is fully leased to the Ministry of National Development of Singapore until 2045. LREIT acquired its first 3.75% stake in JEM in Oct20 and picked up an additional 28.1% stake over Aug-Sep21, taking its stake to 31.85%. The total acquisition cost of S$2,015mn is based on the agreed property value of S$2,079mn (100% basis) and will increase LREIT’s deposited property by 2.1x from S$1.7bn to S$3.6bn. The acquisition will be financed through a combination of debt and equity and could enlarge the share base by 100-121%. The proposed acquisition is subject to shareholders’ approval at an EGM which will be held on 7 March 2021. If approved at the EGM, completion of the acquisition is expected to materialise before 15 May 2022.

What do we think?

The proposed acquisition will double AUM and market capitalisation, making it one of the top 20 largest SREITs, increasing LREIT’s visibility and investor relevance. JEM is one of the dominant malls in the Jurong East, pulling from a catchment of approximately 1.1mn residents as of 2020. JEM’s retail occupancy was 100% as at 31 Dec 21 and remained above 98% throughout the pandemic. Despite the 100% occupancy, the manager managed to increase revenue for the property by creating 1,500 sq ft in additional NLA at Level 1 and Basement 1. The office component is fully leased to the Ministry of National Development on a 30-year lease ending in 2045. The lease is subject to a rent review every 5 years and contributes 20% and 35% of JEM’s GRI and NLA for the year ended 31 December 2021. Strong tenant demand from JEM’s dominant positioning in the Jurong East catchment and stable income from the office component will help to anchor LREIT’s portfolio, forming 58% of FY23e NPI. Acquiring 100% of JEM allows LREIT to qualify for tax transparency on the property, resulting in tax savings.

The large quantum of the acquisition necessitates equity fund raising, which carries a higher cost of capital, making this leg of the JEM acquisition less accretive compared to previous rounds. Based on our forecast, the acquisition of the remaining 86.15% stake in JEM is marginally accretive at 0.1%, in line with the pro-forma DPU accretion of 0.1-3.0%.

Maintain ACCUMULATE and DDM target price of S$0.94

We tweak our forecast to incorporate the acquisition of the remaining 68.15% stake in JEM. FY22e/23e DPUs have been increased by 1.7%/0.3% while FY24-26e DPUs were lowered by 0.4-1.1% due to the enlarged share base. The current share price implies FY22e DPU yields of 6.0%. Pipeline assets for LREIT include Paya Lebar Quarters and Parkway Parade.