• Downgrade to NEUTRAL, revised SGD0.55 TP from SGD0.60, 8% upside. We believe Starhill Global REIT has a good chance to successfully defend Myer’s arbitration claim. Yet, this case will act as an overhang and cap share price amid a sluggish overall interest towards REITs. Operationally, SGREIT has been resilient and is expected to benefit from the boost in Singapore visitor arrivals. The modest gearing of c.36% and c.84% debt hedge puts it in a good position amidst rising interest rates.

• We see limited impact from Myer’s arbitration claim, which alleges breach of the master lease terms (that runs until Jun 2032), claims unspecified damages, and seeks a declaration that it is entitled to terminate the lease. Myer alleges that the landlord breached its lease terms by maintaining the mall in a condition where it was “substantially empty of suitably-presented retail stores”. Myer is the anchor tenant at SGREIT’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. 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. Overall, we see limited downside risks from this claim. Assuming the worst case of Myer’s exit, it would result in a temporary drop of c.15% in DPU. However, we believe SGREIT 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.

• Toshin’s master leases (c.24% of income) are likely to be extended beyond the current term of Jun 2025 with discussions currently in advanced stages. The underlying performance of Taksahimaya speciality stores operated by Toshin has rebounded strongly post COVID-19. We believe new master leases will be at similar base rents (c.SGD13psf) with a potential upside component from percentage of turnover rents, which – in our view – is a win-win for both parties.

• Divestment of Daikanyama for JPY1.9bn (SGD18.9m) 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.

• We adjust FY24F-25F DPU lower by 2-3%, factoring in divestment and tweaking interest costs. Our COE has also been revised up by 50bps resulting in a lower TP. ESG score of 3.1 (out of 4.0), one notch above country median score. Hence, we apply a 2% premium to our DDM-derived TP.

Source: RHB Research - 27 Mar 2023