SINGAPORE - Starhill Global Reit has entered into new conditional master tenancy agreements for its two Malaysian properties for long tenures of about 19.5 years and nine years, said the Reit's (real estate investment trust) manager YTL Starhill Global Reit Management.
The current master tenancy agreements with Katagreen Development for Starhill Gallery and Lot 10 Property, which contributed about 16.6 per cent to the Reit's net property income for the financial year ended June 30, 2018, will expire in June 2019. The Malaysian properties made up about 11.8 per cent of the Reit's total asset value as at June 30, 2018.
The new master tenancy agreements will be for long tenures of about 19.5 years for Starhill Gallery and nine years for Lot 10 Property. 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.
Katagreen Development has specified a condition for the new agreement for Starhill Gallery, that is, asset enhancement works are to be done on the mall. It will undertake the works, which are expected to be completed before the third year of the new agreements, assuming that all approvals required for the works are obtained by June 30. A rental rebate of RM26 million per annum will be given to the master tenant during the asset enhancement works period.
After the asset enhancement works for Starhill Gallery are completed, the initial annual rents under the new master tenancy agreements represent an increase of 1.5 per cent or RM1.3 million (S$430,000) compared to the rents under the existing master tenancy agreements. The initial annual rents payable under the new master tenancy agreements are comparable to the appraised rental values provided by independent valuers, according to the media statement issued on Monday night.
The asset enhancement works will cost RM175 million and all related fees, charges and costs for securing the approvals for the works will be borne by the Reit.
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.
Katagreen Development is an indirect wholly owned subsidiary of YTL Corporation, which has stakes of about 37.09 per cent in the Reit and 100 per cent in the Reit manager. Hence the tenancy agreements and asset enhancement works for Starhill Gallery will amount to an interested person transaction.
As the value of the proposed transaction of S$532.1 million, being the total rent payable under the new master tenancy agreements for the Malaysian properties and the cost of the asset enhancement works for Starhill Gallery, is about 26.7 per cent of the net tangible assets of the Reit as at June 30, 2018, unitholders' approval at a to-be-convened extraordinary general meeting will be required.
On a pro forma basis, after the proposed transaction and upon the completion of the asset enhancement works, the Reit's gearing is expected to increase to about 36.7 per cent from 35.5 per cent as at June 30, 2018.
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 master tenancy starts.
Chief executive officer of YTL Starhill Global, Ho Sing, said: "The long-term structure of the new master tenancy agreements allows SGReit (Starhill Global Reit) to ride short-term risks and tap on the long-term prospects of Bukit Bintang. With built-in rent step-ups, the new master tenancy agreements ensure stable income with rent growth and quality cash flows for SGReit, as well as provide sustainable occupancy for the Malaysian properties."