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Starhill Global Reit extends KL mall leases, lifting overhang

Long-lease tenures secured at Starhill Gallery and Lot 10 with current master tenant Katagreen Development

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An artist's impression of what the Starhill Gallery fa├žade facing Jalan Gading in Kuala Lumpur will look like after the asset enhancement works.

Singapore

STARHILL Global Reit (SGREIT) secured greater visibility over the long-term outlook for two Kuala Lumpur malls after inking fresh master tenancy agreements for the Malaysian properties.

In a Singapore Exchange filing on Monday night, the Reit's manager said that it had entered into new conditional agreements for the Starhill Gallery and Lot 10 malls in Bukit Bintang with the current master tenant, Katagreen Development. As part of the agreement, Katagreen will require asset enhancement works to be carried out at Starhill Gallery, which last underwent major renovations in 2005.

Katagreen is an indirect wholly-owned subsidiary of Malaysia-based YTL Corporation, which in turn is the sponsor of SGREIT. Since YTL Corp also holds a 37.09 per cent stake in SGREIT and entirely owns the Reit's manager, YTL Starhill Global Reit Management, the new agreements for the properties and asset enhancement works will constitute an interested person transaction. Therefore, an extraordinary general meeting will be convened to obtain unitholders' approval.

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The new master tenancy agreements will span 19.5 years for Starhill Gallery and nine years for Lot 10; the new agreements will also incorporate built-in rent step-ups of 4.75 per cent and 6 per cent from the fourth year and every three years thereafter until the expiry of the leases for Starhill Gallery and Lot 10 property respectively.

Following the completion of asset enhancement works for Starhill Gallery, the initial annual rents under the new master tenancy agreements represent an increase of 1.5 per cent, or RM1.3 million (S$431,000), compared to the expiring rents under the existing master tenancy agreements, the Reit said.

The value of the proposed transaction - which includes the total rent payable under the new master tenancy agreements and the cost of the asset enhancement works for Starhill Gallery - works out to S$532.1 million. The annual rents are "comparable" to the appraised rental values provided by independent valuers IVPS Property Consultant and Nawawi Tie Leung Property Consultants, it said.

The Reit manager intends to finance the cost via a combination of external borrowings including Singapore-dollar revolving credit facilities and/or internal working capital.

Meanwhile, about 57 per cent and 23 per cent of the manager's management fees will be paid in units during asset enhancement and after completion of the works respectively, in "support to the minority unitholders by mitigating the disruption and costs resulting from the works" and so as to "stabilise the DPU", the Reit added. It expects a neutral impact on its pro forma DPU (Distribution per Unit).

"This announcement lifts the overhang surrounding SGREIT, and the new master leases will provide strong visibility, given the long lease tenures," said OCBC Investment Research analyst Andy Wong in a research note. "Overall, we believe this development is positive for SGREIT... and removes uncertainties over the longer-term operational outlook of the properties."

The Reit's management highlighted that the new agreements come at a point where rents and occupancies are expected to come under pressure due to an injection of retail supply over the next five years from large-scale, incoming developments in the vicinity such as TRX Mall, Merdeka PNB 118, Bukit Bintang City Centre and Latitud 8.

The existing master tenancy agreements for the properties, which contributed about 16.6 per cent to SGREIT's net property income for the financial year ended June 30, 2018, will cease in June. The two properties account for 11.8 per cent of SGREIT's total asset value as at end June 30.

At Starhill Gallery, a revamped mall entrance, refreshed interiors and better accessibility will be part of the asset enhancement works, which will also seek to tap under-utilised space. In addition, the top three floors will be converted into around 160 hotel rooms as an extension of the JW Marriott Hotel Kuala Lumpur, which is owned by YTL Corp.

Adding the hotel extension should help boost footfall to the mall, highlighted a spokesman of YTL Starhill Global REIT Management, adding it is a win-win proposition since retail rents on the upper floors of malls typically tend to be lower.

The cost of the RM175 million in enhancement works - which could start by July 1 and will take about two years - will be borne by the Reit. Meanwhile, a rental rebate of RM26 million per year will be given to the master tenant during the asset enhancement period.

On a pro forma basis, after the transaction and completion of the asset enhancement works, the Reit's gearing is expected to increase to 36.7 per cent from 35.5 per cent as at June 30, 2018.

Meanwhile, the weighted average lease expiries of the Reit's portfolio by net lettable area and gross rent are expected to increase from 5.7 years and 4.2 years as at Dec 31, 2018 to 9.8 years and 6.4 years respectively, when the new tenancy starts.

Francis Yeoh, chairman of YTL Starhill Global, said: "Bukit Bintang presents long-term prospects. Incoming large-scale integrated developments, improved rail connectivity and government initiatives to boost tourism in Malaysia are set to further enhance the area as the prime retail and hospitality precinct in Kuala Lumpur."

Units in SGREIT closed at 70.5 Singapore cents, up half a cent.