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DBS sees 8.5% DPU downside risk in 'worst case scenario' for Myer arbitration notice

Felicia Tan
Felicia Tan • 4 min read
DBS sees 8.5% DPU downside risk in 'worst case scenario' for Myer arbitration notice
Myer's arbitration claim "remains a puzzle" to the team at DBS. Photo: Samuel Isaac Chua/The Edge Singapore
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DBS Group Research is keeping its “buy” call on Starhill Global REIT with an unchanged target price of 68 cents after the REIT manager announced that it had received a notice of arbitration from its tenant Myer.

Myer, which occupies about 52% of shopping mall Myer Centre Adelaide’s net lettable area (NLA) as at Dec 31, 2022, is alleging that the landlord is in breach of the maintenance of Myer Centre Adelaide in that the place is “substantially empty of suitably presented retail stores”.

In DBS’s view, Myer Centre Adelaide has been proactively managed by the REIT, with new tenants including South Australia’s first Uniqlo at the mall.

“Starhill Global REIT’s Australia occupancy has held consistently above the 90% mark since the onset of the pandemic and was at [around] 94% for the latest reported period in December 2022. Occupancy at Myer Centre has held above the 89% occupancy mark and improved by [around] 4 percentage points (ppt) to 93.0% over the past year,” note the DBS analysts.

“In fact, Starhill Global REIT onboarded Uniqlo as a tenant at Myer Centre in 3QFY2022 which we believe has been a great addition to draw mall traffic at Myer Centre. Opening day sales at Uniqlo drew a crowd of over 3,000 people as its first store in South Australia,” they add.

Intention a ‘puzzle’

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The intention of Myer’s arbitration claim “remains a puzzle” to the team at DBS, who understand that this is not the tenant’s first lawsuit against its landlord.

In November 2021, Australian-listed shopping mall group Vicinity Centres sued Myer over A$4.2 million ($3.8 million) in unpaid rent at its flagship Bourke Street Mall in Melbourne.

Myer had recently gone through another legal proceeding with landlord Vicinity Centres over rental disputes during the Covid-19 pandemic. They were eventually found guilty of a contractual breach over rent delinquency, note the DBS analysts.

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To the analysts, there doesn’t seem to be any potential financial distress on Myer’s end, which has A$244 million in cash and equivalents sitting on its balance sheet. Myer had also recently posted its highest NPAT in nearly a decade for the 2HFY2022 ended July 2022 due to strong rebound in retail spending.

As such, the DBS team believes that the arbitration may have been initiated with Myer’s intention to exit Myer Centre Adelaide before its ongoing lease expires. Myer’s master lease at the mall is not due to expire till 2033.

“Moreover, we understand Myer’s lease at Myer Centre Adelaide to be under market, with tenant interest strong for street front units at Myer Centre Adelaide, which could be a positive return to Starhill Global REIT, if they do exit,” the team notes, adding that this scenario wouldn’t be their base case.

In their base case, however, the team estimates seeing an 8.8% downside risk to their FY2023 net property income (NPI) sans rental income from Myer. This poses a downside risk of 8.5% to Starhill Global REIT’s distribution per unit (DPU) for both FY2023 and FY2024 at 3.2 cents for both years, down from 3.8 cents. The lowered DPU estimate represents a yield of 6.2% at the REIT’s current unit price.

Myer is Starhill Global REIT’s third-largest portfolio tenant, contributing about 7.3% to its total gross rents. The REIT’s exposure to Myer Centre is around 8.3% of its total portfolio valuation and made up 7.4% of its total revenue and 9.0% of its total gross profits for the FY2022 ended June 30, 2022.

To the team, however, there is a “low risk of rental delinquency” across the period of arbitration. During this period, Myer will be required to keep up with contractual agreements on rental repayment, pending the outcome of the arbitration.

The arbitration claim is said to be in its early stages and is not expected to last over 12 months before its completion.

As at 10.53am, units in Starhill Global REIT are trading flat at 53 cents.

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