Starhill Global REIT - RHB Invest 2019-03-21: Long Leases Mitigate AEI Impact; Keep BUY


Starhill Global REIT - Long Leases Mitigate AEI Impact; Keep BUY

  • Starhill Global REIT, a sector Top Pick, is among the cheapest S-REITs – yield 160bps higher than sector average and P/BV of 0.8x, vs sector’s 1.1x. Its Malaysian master lease extensions of 9-19.5 years provide income certainty at the slight expense of upfront capex for AEI.
  • We believe the new master lease is in the unit holders’ best interest amidst the challenging retail market in KL.
  • Still BUY with new Target Price of SGD0.78 from SGD0.80, 11% upside plus 7% yield.

New master lease comes with long-tenure mitigating upfront Asset Enhancement Initiatives (AEI) costs.

  • STARHILL GLOBAL REIT (SGX:P40U) has two Malaysian assets – Starhill Gallery (SG) and Lot 10 Property (Lot 10) – with the current master lease expiring on Jun 2019.
  • Management announced the signing of new master lease agreement with existing master tenant, YTL Corp (YTL MK) (The REITs sponsor), which will have a long tenure of 19.5 years and 9 years (including options) for Starhill Gallery and Lot 10.
  • The initial rental income for the Starhill Gallery master lease is similar to the expiring rent with a built-in step-up of 4.75% after every three years.
  • For Lot 10, the initial rent will be 5% higher than current with 6% rental step up after every three years (Figure4). The transaction is subjected to unit holders’ approval in the upcoming EGM.

Asset enhancement for Starhill Gallery.

  • To better position this mall amidst increasing competition and supply in vicinity, the manager will undertake upgradation works, which include conversion of top three floors into hotel as an extension of the adjoining JW Marriott, revamp mall entrance and refresh interior spaces. The asset enhancements to be undertaken by master tenant, with Starhill Global REIT bearing estimated cost of MYR 175m (~SGD 58.1m) that should be fully funded by debt.
  • Starhill Global REIT would also provide a 6-month rent rebate of MYR26m for the first two years to offset AEI impact.
  • The REIT manager plans to offset the impact to DPU by taking 57% of management fees in units (currently 100% in cash). Gearing, as a result, is expected to see a slight increase to 36.7% (from 35.5%), but still well below the threshold of 45%.

Rationale for master lease extensions is reasonable.

  • Management explained that it explored various options for the mall from direct undertaking of operations to sourcing for another master lessee with different concepts. However, it noted that the above option proved to be best, in terms of strengthening mall positioning and securing earnings sustainability.
  • In the MREITs sector update on 19 Mar, our Malaysian analyst highlighted the oversupply of retail malls plaguing KL. Thus, we believe the long master lease extensions help to mitigate uncertainties/challenges in the retail sector.

DPU adjustments.

  • We lower our FY20F-21F (Jun) DPU by 2-3%, factoring in rental rebates and assuming 60% of management fees in units.
  • Key catalysts are expected turnaround in overseas and Singapore office portfolio.

Vijay Natarajan RHB Securities Research | 2019-03-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.78 DOWN 0.800