RHB Group Research is keeping its “buy” recommendation on Starhill Global REIT (SGREIT) with an unchanged target price of 60 cents, as the stock is the cheapest retail/office S-REIT.

At current valuations, SGREIT is trading at 0.7 times FY2021 book value, below its 10-year -1SD levels, while its peers in retail/office sector have rebounded close to book or premium to book value.

Analyst Vijay Natarajan believes that despite a challenging retail sector outlook weighing down, its portfolio negatives are mostly priced in.

“The reason for this valuation gap, in our view, is due to market concerns on Wisma Atria’s shorter balance land tenure (41 years) and its exposure to high end retail (which has a higher dependence on tourists). The negatives however are offset by stable master/anchor leases which account for about 51% of rental income and strong sponsor support. Thus, we see minimal downside risks to share price at current levels,” says Natarajan.

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Meanwhile, as at end-December, portfolio occupancy remains relatively stable y-o-y at 96%, while committed occupancy for Singapore retail portfolio improved to 99.3% with management signing new tenants such as Skechers, Beryl’s and Haidilao Hotpot.

“We believe rent reversions are likely to be in the -5% to -15% range. Tenant sales in Singapore in 1HFY2021 and footfalls have been on an improving trend in-line with opening of economy and it is currently 31% and 50% below last year’s levels. Rent rebates for 1HFY2021 amounted to $9 million and we expect it to decrease to below $5 million for 2HFY2021, with improving market conditions in Singapore and Australia,” he adds.

Over in Malaysia, Starhill is still undergoing asset enhancement works, despite the Movement Control Order, with estimated completion by the end of 2021. As its Malaysian assets (The Starhill and Lot 10 Property) are on long-term master leases with sponsor, there is limited downside risk.

Similarly Toshin master-lease for Ngee Ann city (about 22% of income) runs until June 2025. Hence, Natarajan does not anticipate any credit risks or lease defaults from these tenants.

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Capitalising on the current low interest rate environment, Starhill issued $100 million in perpetual securities in December, with an attractive initial coupon of 3.85% per annum (reset after every five years), with proceeds mainly used to pare down A$55 million loan and existing debts under its revolving credit facilities.

“Gearing, as a result, remains comfortable at 35.8% and we believe Starhill might opportunistically look at acquisition opportunities (mainly office assets) in the near-term including remaining stake at Wisma Atria,” says Natajaran.

As at 11.15am, units in SGREIT are trading at 52 cents with a FY2021 dividend yield of 7.4%.