RHB Bank Singapore’s Vijay Natarajan has maintained his “buy” call on Starhill Global REIT with an unchanged target price of 58 cents following a sustained increase in assets and occupancy for both the REIT’s Singaporean and overseas portfolios.
“With [a] high occupancy [rate], we expect rental reversions to remain positive in the mid- to high- single digits,” he says in his report dated March 22.
Since June 2023, full committed occupancies have been reached for both retail and office portfolios amidst current renovations. With these asset enhancements underway at Wisma Atria, Natarajan expects the mall’s improved appeal to attract an influx of tenants. This bodes well for rent and retail reversions due to the rise in demand from a multitude of sectors.
In addition, the analyst likes that there is room for higher rents in the newly-renewed master lease with Toshin Development Singapore. The lease was renewed in November 2023 for an initial term of 12 years beginning from June 8, 2025. It will expire on June 7, 2037.
“[The] annual base rent for the first three years will be higher at 1% above [its] existing base rents and [the] prevailing annual rental value at the start of [the] lease as agreed by both parties,” he says”. Should these conditions not be met, the annual base rent will be based on average market rental values determined by three valuers but not exceeding 125% of option A, he adds.
“The annual fixed rent will be subject to rent review every three years during the lease-term. In addition, there will be a profit-sharing agreement if revenue and profit margin thresholds are met – providing additional upside,” he continues.
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Toshin, which is the master tenant for Ngee Ann City, occupying all of the property’s retail floors save for the fifth level, is the REIT’s largest tenant, accounting for 23% of its income in the 1HFY2024 ended Dec 31, 2023.
In Australia, occupancy across the REIT’s assets rose to 96.9%, 2.4 percentage points higher h-o-h with its Perth and Myer Centre Adelaide properties registering improvements. On Myer Centre Adelaide, the REIT has not issued further updates since its initial announcement in March 2023, but the analyst sees “minimal downside risks” so far.
Another plus, in the analyst’s view, is the REIT’s gearing which remains “modest” at 36.8%. This gearing allocates a debt headroom of $100 million for further acquisitions. The REIT’s management previously voiced its plans to “selectively look at good quality office assets and is also open to divesting some of its overseas assets at the right opportunity”. With an estimate of 78% of the REIT’s debts being hedged, the analyst forecasts financing costs to peak at around 4%.
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Despite these positive driving factors, the analyst has lowered his distribution per unit (DPU) estimates by 2% as he factors in the potential persistent rise of interests which will affect the REIT’s finance costs.
His target price includes an environmental, social and governance (ESG) premium of 2% with the REIT’s ESG score raised to 3.2 due to an improvement in its board governance.
As at 3.29pm, shares in Starhill Global REIT are trading 0.5 cents higher or 1.05% up at 48 cents.
