Lendlease Global Commercial REIT - An undervalued Retail & Commercial REIT investment

In just 3 months since the great sell down of the stock market, stocks have started to rally with most REITs going up more than 20% from their lows. The big names like Capitaland Mall Trust, Capitaland Commercial Trust, Suntec REIT and Frasers Centrepoint Trust have all went up. My returns from these REITs now ranges from 10% to close to 40%. Yes, I bought quite a few REITs when Singapore was still in lockdown and all the malls were closed. It wasn't an easy decision to make since the economic situation is still quite bad out there but with such attractive valuations, I couldn't resist to put my money to work. 

With all the rally, I believe there are still opportunities to invest as the situation out there is still dynamic and STI index has not covered back to Pre-COVID-19 days. In this post, I will focus on Lendlease Global Commercial REIT. This is a new REIT which just IPO last year Oct at $0.88 and they only have 2 properties in their portfolio, one in Singapore and one in Italy. I applied for the IPO back then but did not get it. On hindsight, I was lucky not to have got it last year as I can invest in it at much lower price now. Let's start the bargain hunting. 

Lendlease REIT has 1 property in Singapore focusing on retail. This is non other than the popular 313@somerset which we are familiar with. 313@somerset contributes 2/3 of the NPI to Lendlease REIT. In Italy, they have a commercial property called Sky Complex, Milan. Let's take a look at the stock chart to see where the stock is at now.

As you can see, Lendlease IPO at about $0.88 and traded at about $0.90 consistently for the next few months. When the COVID-19 situation got worse, it went down in a straight line just as what happened to the other stocks as well. The price of the stock went down as much as 50% at the lows which was extremely attractive. It was trading at a discount to NAV of more than 50% at that point in time. 

Many investors seem to realise this and started to scoop up shares of Lendlease REIT at the low. This is like buying a property at prime land at Orchard road just above Somerset MRT at 50% of the price. The normalised dividend yield would have also been more than 10% at the low. 

The question is, will Lendlease REIT survive this crisis? Let us look into the REIT in detail.

Tenants at its properties

Majority of the leases for its tenants at 313@somerset have been renewed for FY2020 except for 5% due for renewal in FY2021. For Sky complex, Milan, its on long term leases till 2032. All in all, this will prevent a scenario where tenants demand lower rental due to COVID-19 when their renewal is up. Based on its 3Q financial results update on 5th May 2020, Lendlease still has a occupancy of 99.8% at its properties. 

Most of the leases will expire only in 9.9 years time which is a long time before the next renewal. This is because for Sky Complex, Milan, the leases are very long at average 12 years. For 313 @somerset, the WALE is 1.8-1.9 years. 

Healthy Balance Sheet

A healthy balance sheet is the most important when investing in times like this. Their gearing ratio is at 35.9% as at 31 March 2020. They still have ample room to increase their debt if needed. One thing that strikes out is their low borrowing cost at 0.86% which is much lower than any local REITs listed on SGX. This gives them an interest cover ratio of 11.2x which is a clear winner comparing to other retail REITs!

If we look deeper into their debt profile, we can see why they can get such low interest on their borrowing cost. Most of their loans are on Euro term loan at 0.58% p.a. Their average weighted debt maturity is at 3.3 years so there is no refinancing till FY2023. This would alleviate any concerns of them not being able to refinance their loans in times of the COVID-19 crisis now.

Valuation

Lendlease REIT has an NAV of $0.82. At current price of $0.715, it is still trading at a slight discount to its NAV. Normalising the DPU of 1.28 cents per quarter, we will get a DPU of 5.12 cents. This gives us a decent dividend yield of about 7%. 

On capitalization rate, 313@somerset has a cap rate of 4.5% which is comparable to properties such as Plaza Singapura in retail REITs like CMT. For Sky Complex, Milan, the cap rate is 5.75% which is normal for overseas office properties. The cap rate is the rate of return that an investment property will generate based on its current market value. It is calculated by taking the Net Property Income (NPI) dividend by the current market value of the property. 

Conclusion

With all the factors above, I believe Lendlease REIT will survive this crisis. The retail space should be the first to recover after phase 2 of the circuit breaker where we are allowed to dine in again at restaurants and more retail shops to be allowed to open. 

However, we must always understand that in times like this, stock prices can always go lower and we should only invest money which we can afford to lose and not use it for at least the next 1 year. Who knows a second wave of infection may come and Singapore goes into a lock down again. This should send stock prices diving down again. 

Nevertheless, I have invested into Lendlease REIT at lower prices than the current price and would accumulate if there are opportunities to buy on dips. With all the rally going on, a pull back should happen soon and that would be the time to accumulate. 

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