The first of the anticipated master tenancy agreement re-negotiations for Starhill Global REIT (SGR) came to a head yesterday. The REIT shared the details of the new Master Tenancy Agreements for their KL properties (Starhill Gallery and Lot 10 Property) yesterday.
As a unitholder, I have a vested interest for diving into the details of the deal. So let’s take a look.
Master Tenancy Agreement Details
The agreement involves 2 elements bundled together – A new lease and an asset enhancement initiative (AEI).
AEI Details
Starhill Gallery will be undergoing some pretty significant renovations including a revamped mall entrance, open public square for events and significantly, converting 3 floors into hotel rooms as an extension for YTL’s JW Marriott KL.
The AEI is anticipated to cost SGR about RM175m and take about 2 years to complete. The AEI is funded entirely by debt and internal working capital.
Lease Details
Starhill Gallery will be master leased under a whopping 19.5 year lease starting at RM52m p.a. with built in 4.75% rental escalations every 3 years.
Lot 10 Property on the other hand will be master leased for 9 years starting at RM33.7m with built in 6% rental escalations every 3 years.
Due to the AEI works, there will be a RM26m rental rebate given to the Master tenant due to disruption in operations at the mall. The drop in rental income will be rendered DPU neutral as the REIT manager is taking a portion of their management fees in units.
Financial Impact of Agreements
DPU Neutral
The agreement is DPU neutral as mentioned earlier.
Small / No Drop in NAV, Slight Increase in Gearing
NAV will drop from 91 cents to 90 cents. If you use Q2 FY2019 NAV of 90 cents, it is actually no change in NAV. There is a 1.2% increase in gearing.
Longer Weighted Average Lease Expiry (WALE)
The longer leases gives the REIT greater income visibility, in the process pushing WALE from 5.7 years and 4.2 years by NLA and gross rent respectively, to 9.8 years and 6.4 years.
Key Risk – Unforeseen Delays in Completion of AEI
Should the AEI at Starhill Gallery be unexpectedly delayed beyond 2 years, the RM26m rebate has to continue. This will delay the increase in rental income in the process.
Final thoughts
In a nutshell, investors are getting not much change in DPU and NAV, a newer asset, while extending the REIT’s WALE. While unexciting, this is overall a positive for long term investors like myself. Having augmented my SGR position by another 10,000 units earlier this month, I’m decently happy with this piece of news.
Now bring on the Toshin Master Lease renewal.
Happy Hunting,
KK
PS. I’m currently hold 25,000 units of SGR. The information presented in this article are for general information only and does not constitute a call to buy or sell shares. Please do your own due diligence prior to investing.
You may also like my earlier review of Starhill Global REIT.
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