Starhill Global REIT - RHB Invest 2020-06-03: Attractive Valuation; Upgrade To BUY


Starhill Global REIT - Attractive Valuation; Upgrade To BUY

  • While outlook for the retail sector remains grim, Starhill Global REIT (SGX:P40U)’s master/anchor leases, which account for nearly half of its rents, provide some stability. 
  • Its balance sheet remains relatively healthy (gearing: 36.7%) with no near-term debt refinancing concerns.
  • With the stock trading near -2SD (0.6x P/BV) and being a laggard among retail REIT peers in terms of valuation, we see room for rebound.

Attractive valuation compared to retail peers.

  • Among retail S-REITs, Starhill Global REIT trades at an attractive 0.6x P/BV compared to peer average of 1x P/BV and sector average of 1.1x P/BV. We believe the reason for valuation gap is due to market concerns on its exposure to high-end retail, Wisma Atria’s shorter remaining land tenure (41 years), and declining average retail rents.
  • At current levels, we believe the negatives have been fully priced in.

Impact of COVID-19.

  • On 18 May, Starhill Global REIT announced that it set aside SGD18.1m for rental rebates (~2 months) including estimated property tax rebates of SGD10.8m. See Starhill Global REIT Announcements. With the Fortitude budget announced by the Government requiring landlords to offer additional rental assistance to SME retail tenants, we expect it to provide an additional SGD5-10m in rent rebates.
  • On its Australian portfolio, the manager is currently close to finalising the rent relief package to tenants. Our model has factored in ~AUD6m (or 1.5 months of rent rebates).
  • Starhill Global REIT's Malaysian assets under master leases have so far been offered ~SGD0.4m in terms of rent rebates. While overall occupancy for 3QFY20 (Jun) remained high at 96.3%, we expect pressure on occupancy and rents in the coming years. Our numbers have factored in c.5% decline in retail occupancy over the next two years.

Master leases and office portfolio mitigate overall impact.

  • Starhill Global REIT has two master leases –Toshin master leases in SG (expiring in 2025) and long-term master leases for Malaysian portfolio – which together account for 33% of 3QFY20 revenue. Despite COVID-19, we do not expect any defaults or delays in master lease rental payments as the lessees are still in good financial shape. Additionally, office portfolio, which accounted ~15% of 3QFY20 revenue is fairly less impacted from COVID-19, in our view.

Gearing stands at 36.7%

  • Starhill Global REIT's gearing stands at 36.7% well below the revised 50% threshold, and even after including the planned asset enhancement capex for Malaysian malls it is expected to remain < 40%. About 87% of its debt is hedged and FX risk is mitigated by natural hedge and FX forward contracts.

Earnings and assumption changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-06-03
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 0.63 DOWN 0.760