RHB Research has maintained a “buy” call on Starhill Global REIT with a target price of 60 cents, down from its previous price of 63 cents.

Analyst Vijay Natarajan said while its outlook remains weak, its valuation of 0.6x P/BV (trading at -2SD, retail REITs average: 0.95x P/BV) and yield of about 8% implies that negatives have largely been priced in.

He noted FY20 distributable income for the REIT was down 20% y-o-y, before income retention. The final FY20 DPU includes income retention amounting to $7.7 million, while its capital allowance claim of $3.7 million was lower by 34% y-o-y. 

FY20 numbers include a total allowance for rental arrears and rebates of SGD32.2m, including $15.2 million in property tax rebates. 

Natarajan said the REIT’s overall portfolio occupancy rate stood at 96.2% (slightly down from 3Q20’s 96.3%). He added management noted that retail demand has weakened considerably, with more tenants exiting – compared to new demand. 

Moving forward, keeping mall occupancy rates high will be its key focus. About 16% of leases by gross rentals are due for renewal in FY21, with the bulk coming from Wisma Atria (WA) – for which he expects negative rental reversions of 5-15%.

The REIT’s portfolio value also dropped by 4% mainly due to WA and the Australian assets. WA’s valuation dropped by 4.6%, mainly on lower rental assumptions ahead. For the Australian properties, management attributed the 19% drop in valuation to its high exposure to 0.30 department stores, which have been hard hit by COVID-19.

Gearing stands at 39.7%, but with a cash buffer of $117 million, however, net gearing is at about 37%, and asset values have to fall by over 20% before it breaches the 50% threshold. 

He said management aims to revamp WA amidst the current weak market conditions, to strengthen and better position it for future growth, with an estimated capex of about $10 million.

However, a bright spot for the REIT is the resumption of operations at Starhill Gallery and Lot 10 in Malaysia have resumed operations. The REIT has offered about two weeks of rental rebates to its master lessee. Asset enhancement works at Starhill Gallery have resumed, with only slight delays expected on its completion in 2H21. 

He said both assets are on long master leases, which mitigates the medium-term impact of the pandemic.

As at 10.37 am, units of Starhill were trading flat at 46 cents, with a dividend yield of 8.3%.