• Starhill Global REIT (SGX:P40U)’s FY20 DPU (excluding income retention) is broadly in line. 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 8% implies that negatives have largely been priced in.

Starhill Global REIT's FY20 Distributable Income Was Down 20% Y-o-y, Before Income Retention

• Meanwhile, Starhill Global REIT's final FY20 DPU includes income retention amounting to SGD7.7m, while its capital allowance claim of SGD3.7m was lower by 34% y-o-y.
• FY20 numbers include a total allowance for rental arrears and rebates of SGD32.2m, including SGD15.2m in property tax rebates.
• Starhill Global REIT will provide rental relief for July, for qualifying small and medium-sized enterprise tenants in Singapore (~50-60% of total tenants). Only two tenants applied for rental deferral (six months) under the COVID-19 bill.
• For its Australian asset, it will be offering rental rebates (capped at 50%) to tenants in line with their sales declines, up until the end of the year. No further rental rebates are anticipated for its other overseas assets.

Occupancy Rates Remain Stable But Rentals to Come Under Pressure

• Starhill Global REIT’s overall portfolio occupancy rate stood at 96.2% (3QFY20: 96.3%). 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. 16% of leases by gross rentals are due for renewal in FY21, with the bulk coming from Wisma Atria (WA) – for which we expect negative rental reversions of 5-15%.

Portfolio Value Dropped by 4%

• Starhill Global REIT's portfolio value dropped by 4% mainly due to Wisma Atria and the Australian assets.
• Wisma Atria’s valuation dropped by 4.6% (unchanged cap rates), mainly on lower rental assumptions ahead.
• For the Australian properties, management attributed the 19% drop in valuation to its high exposure to department stores, which have been hard hit by COVID-19.
• Starhill Global REIT's gearing stands at 39.7%. Including a cash buffer of SGD117m, however, net gearing is at ~37%, and asset values have to fall by > 20% before it breaches the 50% threshold.
• Management aims to revamp Wisma Atria amidst the current weak market conditions, to strengthen and better position it for future growth, with an estimated capex of ~SGD10m.

Starhill Gallery and Lot 10 in Malaysia Have Resumed Operations

• Starhill Global 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 (2H21). Both assets are on long master leases, which mitigates the medium-term impact of the pandemic.

Maintain BUY

• We cut FY21-22F DPU by 7-8%, factoring in additional rent rebats and lower rental rates.
• Keep BUY, new Target Price of SGD0.60 from SGD0.63, 28% upside with 8% FY21F (Jun) yield.

Source: RHB Invest Research - 3 Aug 2020