The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. — Ed.
Following two rounds of refinancing this year for Lotte REIT, W650bn of additional refinancing is scheduled for 1H23. Although a reduction in FFO looks unavoidable in the short term, the pace of cash flow recovery should accelerate once the interest rate environment improves.
When interest rate environment improves, cash flow recovery should be quick
Although adhering to a Buy rating, we lower our TP on Lotte REIT from W7,300 to W5,200 on an expected decline of FFO over the mid/long term (due to rising cost of capital). We maintain a Buy rating, as the firm should recover quickly through asset incorporation, based on its robust borrowing capacity and excellent credit rating, once the interest rate environment improves.
Among K-REITs, Lotte REIT looks the most stable both in terms of quantity and quality, with assets of W2.3tn, stable LTV (42%, based on appraised asset value), and master lease tenants boasting high creditworthiness (Lotte Shopping, Lotte Global Logistics). Given its holding of right of first offer (ROFO) for high-quality assets of Lotte Group, its asset pipeline looks solid. We expect that asset incorporation will be active once the interest rate environment improves.
Dividend earnings erosion inevitable in near term, but valuations attractive
In July of this year, refinancing was carried out for secured corporate bonds worth W170bn, and in October, secured loans worth W478bn were refinanced. In 1H23, refinancing is scheduled for short-term bonds worth W200bn and secured loans worth W458bn. Interest burden in 2H22 and 1H23 is forecast to increase by W5.1bn and W13.5bn, respectively, compared to the 1H22 level. In 2023, FFO and DY are projected at W56bn and 6%, respectively.
At Lotte REIT, P/NAV sits at 0.8x, lower than that for other K-REITs (SK REIT 1.2x, JR Global REIT 1.0x). As the amount subject to refinancing in 2023 is substantial, FFO decline will not be insignificant, but the situation is still superior to that for other K-REITs in terms of absolute cash generation based on high-quality assets.
