RHB on Monday (Mar 27) downgraded its recommendation on Starhill Global Real Estate Investment Trust : P40U 0% (Reit) mall to “neutral”, and lowered its target price to S$0.55 from S$0.60. It believes Myers’ arbitration claim could weigh on the Reit’s trading price.

The Business Times reported last week that the anchor tenant of Starhill Global Reit’s mall in South Australia launched arbitration proceedings to claim unspecified damages and seek entitlement to terminate its lease, which runs till June 2032.

Department store chain Myer said its landlord has breached, and is continuing to breach, its lease terms by maintaining the mall in a condition where it is “substantially empty of suitably presented retail stores”.

Myer occupies about 52 per cent of Myer Centre Adelaide’s net lettable area as at end-2022. It accounts for 7.4 per cent of the Reit’s FY2022 revenue and 9 per cent of its net property income.

Assuming the worst-case scenario of Myer’s exit, analyst Vijay Natarajan thinks this could result in a temporary drop of 15 per cent in distribution per unit (DPU) for the Reit.

However, the analyst added that the impact from the arbitration claim could be limited.

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“From management, we understand that the mall performance is broadly improving, with occupancy at 93 per cent, coupled with an increase in footfall and tenant sales, with the newly opened Uniqlo outlet – in particular – attracting good crowds,” he said.

He thus believes that the Reit would be able to backfill the space at similar rent rates, although the process could take time.

The Reit’s performance could continue to be supported by an extension of Toshin’s master leases – which the analyst believes is likely, noting that the underlying performance of Takashimaya speciality stores operated by Toshin has rebounded strongly post-Covid.

Starhill Global Reit’s divestment of its Japanese property Daikanyama at a 39 per cent premium over valuation and an exit yield of 2.77 per cent could be used to pare down debt. It could also bring gearing down to slightly below 36 per cent, said Natarajan.

This would give the Reit some headroom for good opportunities, he added.

Taking into account divestment and interest costs, RHB lowered its estimates on the Reit’s DPU by 2 to 3 per cent for FY2024 to FY2025. It revised up cost of equity estimates by 50 basis points, leading to a lower target price of S$0.55.

Units of the Reit were trading 2 per cent or S$0.01 higher at S$0.52 as at 10.09 am.