• While outlook for the retail sector remains grim, Starhill Global REIT (SGX:P40U)’s master/anchor leases, which account for nearly half of its rents, provide some stability.
• Its balance sheet remains relatively healthy (gearing: 36.7%) with no near-term debt refinancing concerns.
• With the stock trading near -2SD (0.6x P/BV) and being a laggard among retail REIT peers in terms of valuation, we see room for rebound.

Attractive Valuation Compared to Retail Peers

• Among retail S-REITs, Starhill Global REIT trades at an attractive 0.6x P/BV compared to peer average of 1x P/BV and sector average of 1.1x P/BV. We believe the reason for valuation gap is due to market concerns on its exposure to high-end retail, Wisma Atria’s shorter remaining land tenure (41 years), and declining average retail rents.
• At current levels, we believe the negatives have been fully priced in.

Impact of COVID-19

• On 18 May, Starhill Global REIT announced that it set aside SGD18.1m for rental rebates (~2 months) including estimated property tax rebates of SGD10.8m.
• On its Australian portfolio, the manager is currently close to finalising the rent relief package to tenants. Our model has factored in ~AUD6m (or 1.5 months of rent rebates).
• Starhill Global REIT's Malaysian assets under master leases have so far been offered ~SGD0.4m in terms of rent rebates. While overall occupancy for 3QFY20 (Jun) remained high at 96.3%, we expect pressure on occupancy and rents in the coming years. Our numbers have factored in 5% decline in retail occupancy over the next two years.

Master Leases and Office Portfolio Mitigate Overall Impact

• Starhill Global REIT has two master leases –Toshin master leases in SG (expiring in 2025) and long-term master leases for Malaysian portfolio – which together account for 33% of 3QFY20 revenue. Despite COVID-19, we do not expect any defaults or delays in master lease rental payments as the lessees are still in good financial shape. Additionally, office portfolio, which accounted ~15% of 3QFY20 revenue is fairly less impacted from COVID-19, in our view.

Gearing Stands at 36.7%

• Starhill Global REIT's gearing stands at 36.7% well below the revised 50% threshold, and even after including the planned asset enhancement capex for Malaysian malls it is expected to remain < 40%. About 87% of its debt is hedged and FX risk is mitigated by natural hedge and FX forward contracts.

Earnings and Assumption Changes

• We lower our FY20F-22F DPU by 8- 19%, factoring in rent rebates, lower occupancy levels and rent. Our COE assumption is also raised by 70bps to 7.9%.
• Upgrade Starhill Global REIT to BUY from Neutral with new Target Price of SGD0.63 from SGD0.76, 17% upside and 7% yield.

Source: RHB Invest Research - 3 Jun 2020