RHB Bank Singapore has downgraded Starhill Global REIT from “buy” to “neutral” following news that the REIT is likely to suffer an overhang from arbitration claim from Myer, an Australian retailer that leases from the REIT.
In his March 27 note, analyst Vijay Natarajan says that the REIT has a good chance to defend the claim.
“Yet, this case will act as an overhang and cap share price amid a sluggish overall interest towards REITs,” notes Natarajan.
He has also revised his target price to 55 cents from 60 cents, following a lowered earnings estimate that has taken into account potential divestment and higher financing costs.
Myer is the anchor tenant at the REIT’s Myer Centre Adelaide, occupying 52% of NLA, accounting for 7.4% and 9% of FY22 (Jun) revenue and NPI, and is currently paying rent.
Myer alleges that the REIT breached its lease terms by maintaining the mall in a condition where it was “substantially empty of suitably-presented retail stores”.
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Myer is seeking unspecified damages and early termination of the lease that is to end at June 2032.
“From management, we understand that the mall performance is broadly improving, with occupancy at 93%, coupled with an increase in foot fall and tenant sales, with the newly opened Uniqlo outlet – in particular – attracting good crowds.”
Natarajan sees “limited downside risks” from the claim. Under his worst-case scenario, if Myer is to exit, it would result in a temporary drop of around 15% in distribution per unit.
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Natarajan believes that the REIT will be able to backfill the space at similar rent rates, as the rent paid by Mayer is close to market levels, although the process could take some time.
Separately, another major tenant, Toshin, is likely to extend its lease beyond the current term ending June 2025.
Toshin, which contributes 24% of the REIT’s income, operates the Takashimaya department store, the anchor tenant of Ngee Ann City.
Natarajan notes that the underlying performance of Taksahimaya speciality stores operated by Toshin has rebounded strongly following the pandemic.
“We believe new master leases will be at similar base rents, of around $13 psf, with a potential upside component from percentage of turnover rents, which – in our view – is a win-win for both parties,” writes Natarajan.
In addition, the REIT has divested Daikanyama for JPY1.9bn ($18.9 million), which, from the perspective of the RHB analyst, is a timely move at a 39% premium over valuation and an exit yield of 2.77%.
“The proceeds will be used to pare-down debt and bring gearing slightly below 36%, which we believe is a comfortable level and gives headroom for good opportunities,” he adds.
Starhill Global REIT, as at 9.52am, changed hands at 52 cents, up 1.96%.
