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RHB keeps Starhill Global REIT's TP at 68 cents, calls the REIT a ‘reopening play at a bargain’

Felicia Tan
Felicia Tan3/24/2022 03:39 PM GMT+08  • 3 min read
RHB keeps Starhill Global REIT's TP at 68 cents, calls the REIT a ‘reopening play at a bargain’
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RHB Group Research Vijay Natarajan is keeping his “buy” recommendation on Starhill Global REIT with an unchanged target price of 68 cents.

The REIT’s current valuation is considered a “bargain” as it will benefit from the reopening of Singapore’s economy, says the analyst.

“[Starhill Global REIT’s] Orchard Road malls should be among the beneficiaries of the border reopening and gradual return of tourists. With [a] relatively strong balance sheet (gearing: 36%), and bulk (90%) debt hedged, coupled with an attractive 0.7x P/BV, we believe the REIT’s risk-reward profile is tilted towards the upside,” writes Natarajan in his March 24 report.

To date, the REIT’s portfolio has remained resilient amid the challenging market conditions, and outperformed expectations. Its Singapore retail portfolio reported a committed occupancy rate of 99.6%, up 0.4 percentage points q-o-q as at end-December. The figure stands among its highest in the last five years.

Occupancy at the REIT’s key Wisma Atria mall grew 2.28 percentage points to an occupancy rate of 98.9% with new tenants from the food and beverage (F&B) and jewellery space.

However, the analyst points out that the REIT’s rent reversion is expected to remain under pressure at FY2022 at a range of -10% to -20%.

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This, he says, is mitigated slightly by the fact that only 14.8% of leases are pending renewal in FY2022.

In Malaysia, the REIT’s asset enhancement at The Starhill has been completed. The mall is also currently under a long master lease till 2038, with a step-up of 4.75% in rental every three years.

Similarly, the REIT’s master leases for its other Malaysian asset, Lot 10, KL is until June 2028, with a 6% rental step-up once every three years.

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These two assets account for 15% of portfolio value and offer income stability despite concerns over Malaysia’s challenging retail market conditions, note Natarajan.

In Australia, the market is showing signs of a turnaround. The REIT’s net property income (NPI) in the 1HFY2022 ended December rose 10.6% y-o-y due to lower rental rebates and allowance for rental arrears.

To this end, Natarajan says he expects the REIT to provide minimal rental assistance ahead with the Australian government relaxing most of its Covid-19 related restrictions.

Leasing activity has also picked up with Uniqlo opening its first retail store (measuring 10,000 sq ft) at the Myer Centre in Adelaide, South Australia, and the expansion of the existing tenant, CDW Studios, notes the analyst.

Finally, the REIT manager has announced its intention to diversify its portfolio mainly via the acquisition of office assets in markets such as Japan, the UK and Australia, something Natarajan is positive on.

The REIT is looking at a medium- to long-term target of 50% revenue from the office segment, which currently stands at 14.4%.

“Gearing is comfortable at 36.1%, presenting debt head room (of over $300 million assuming 45% levels), for a combination of higher debt mix to make an accretive acquisition,” writes the analyst.

To this end, he has upped his distribution per unit (DPU) estimates by 0%-2% for the FY2022 to FY2024 due to adjusted occupancy and interest cost assumptions.

As at 3.35pm, units in Starhill Global REIT are trading 1.5 cents higher or 2.57% up at 60 cents, or an FY2022 P/B of 0.71x.

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