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The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. — Ed.
The timing of refinancing, which has arrived during a period of interest rate hikes, is unfavorable for Lotte REIT, but the rate of return should be preserved by incorporation of additional assets using leverage. With retail industry conditions improving in earnest, FFO is to rise by 10% y-y in 2022.
To incorporate additional assets using leverage
We maintain a Buy rating and a TP of W7,300 on Lotte REIT. Although refinancing timing is unfavorable at a time of rising interest rates, possessing the industry’s lowest level LTV should allow sufficient room for an upward move, allowing for the inclusion of additional assets.
In Jul and Oct 2022, corporate bonds of W170bn (interest rate of 1.55%) and collateralized loans of W478bn (interest rate of 2.27%) are about to be refinanced. Given an increase in the value of Gangnam Lotte Department Store property, the firm should be able to issue additional corporate bonds worth W30~40bn. It is predicted to reduce the portion of collateralized loans in order to streamline interest expenses
In 2022, Lotte REIT plans to incorporate additional assets totaling around W500bn. With retail and logistics center assets owned by Lotte Shopping and Lotte Global Logistics amount to W8.7tn, Lotte REIT is securing a stable deal pipeline. Currently, LTV stands at 48%, a low level compared to that for other REITs, so we see ample room for additional borrowing. Lotte REIT is planning to secure high return by minimizing the portion of equity capital when incorporating assets.
Rent fees linked to CPI and sales at business place
The business conditions of Lotte Shopping, the lessee, are expected to continue improving in line with the fading of the Covid-19 crisis. Of note, assets incorporated through recapitalization in Mar 2021 receive fixed and variable rents linked to the previous year’s CPI and sales, respectively. The value of assets that can be passed on to rent from the increase in CPI and sales is W778.2bn, accounting for 34% of total assets.
Reflecting such, 2022 annual earnings are estimated to show W115.2bn in operating revenue (+10% y-y) and W67.8bn in OP (+10% y-y). FFO and DY are projected at W80.1bn (+10% y-y) and 5.5%, respectively.
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