Here is the final episode on whether the main tenants of REITs can afford their rents. Any signs of tenants not able to pay their rents is definitely going to cause a dip in a REIT's price, at least in the short term.

Why short term? Well, the REITs still own the buildings, and what is uncertain is whether another tenant takes up the buildings, or is willing to pay a similar rental rate.

You can check out the previous episodes here:
Part 1 - https://www.llamafinance.com/2020/05/are-you-sure-your-reits-dividend-is.html
EC World - https://www.llamafinance.com/2020/06/can-forchn-holdings-pay-off-rents-to-ec.html
Part 2 - https://www.llamafinance.com/2020/07/are-you-sure-your-reits-dividend-is.html
Part 3 - https://www.llamafinance.com/2020/07/are-you-sure-your-reits-dividend-is_11.html
Part 4 - https://www.llamafinance.com/2020/07/are-you-sure-your-reits-dividend-is_15.html

We have covered ranks 1 to 6 so far, including EC World too! Do visit my past posts linked above if you are interested to see if the respective REIT's significant tenants are able to afford the rents.

Rank 1: Elite Commercial GBP REIT at 99%
Rank 2: First REIT at 81.59%
Rank 3: Parkway Life REIT at 58.5%
Rank 4: iReit Global at 45.80%
Rank 5: Keppel DC at 41%
Rank 6: Lendlease Global at 29%
Rank 7: Starhill Global at 22.9%


Without further a-do, let's start!

Starhill Global REIT

I believe this REIT needs no introduction. In my previous post, I mentioned that I had been to Somerset 313 and the crowd was good. Thereafter, I have been to Suntec consecutively for past 3 weeks with Mrs Llama.

Somehow, the crowd seemed to increase exponentially every week. Just 2 days back, I had been to Wisma, I was unable to find a dining spot and had to settle for Menya Musashi Ramen. Every restaurant in Takashimaya and Wisma had a queue on a Saturday at 12.15-12.30pm.

Walking down from Orchard, Somerset 313 was even more crowded. There was little or no walking space between 313 and Orchard Central mall (walkway near Irvin's Salted Egg). The popular coffee spot "%" was full like a Shisha outlet at Arab Street years back (its packed with people, in a messy way).

Back to our main point, does this reflect recovery for retail? There are already analysts reflecting that foot traffic for shopping in malls are dropping only by 30-40%. Internally, I think foot traffic is instead increasing, The data presented by analysts have a time lag as compared to what you see at malls yourself. However, I believe most people you see, tend to spend more on eating instead of shopping just like myself.

With malls being more and more crowded, stock price for Starhill didnt do too well in the short-term, dropping from $0.50 last week to $0.480 during today's market close.

Top 10 tenants
Here, we have the top 4 tenants - Toshin Development, YTL Group, Myer Pte Ltd and David Jones. These 4 tenants make up 45.1% of Gross rental income of Starhill Global REIT.

Shall we take a look at Toshin Development Singapore Pte Ltd first?

1. Toshin Development Singapore
Interestingly, Toshin is not only operating the Takashimaya Department Store, it is also operating the other Luxury brands you see within Takashimaya Shopping Centre at Ngee Ann City.


Toshin Development SG is a wholly owned subsidiary of Toshin Development Co Ltd, which is in turn wholly owned by Takashimaya Company Limited.

I have managed to get some color on the performance of Toshin SG from Takashimaya IR website. According to the slide below, it seems Singapore Retail is resilient compared to China. However, you can say that Circuit breaker has not began in March. given that circuit breaker has ended already, could we forecast that the performance is somewhat at this level? 22.2% drop from 2019 levels.

I am thinking that Toshin development Singapore below represents rental collected from respective tenants? Tenants like Cartier, Celine, Chanel, Chopard, Dior, Fendi, Louis Vuitton, The Hour Glass and Tiffany & Co which are located in Takashimaya Shopping Centre.

Is Takashimaya able to afford the rents then? Taken from Takashimaya Company Ltd Annual report 2019, it seems to be a profitable business, despite a decline from 2018 to 2019. You can view the picture below for more details.


You must be curious about its 2020 results. Me too. I have managed to obtain its 2020 financials, not sure if it's audited though. According to latest disclosure, it seems Gross Profit for Takashimaya Company Ltd has fallen by almost 50% to 24.2 million yen for 3 months ended May 31, 2020.

The company has also since fallen into a loss situation, where its loss for the period ended 31 May, 2020, is (20.436) million yen, equivalent to 267.95 million SGD. If a single shopspace closes down, we are confident that another tenant will take over the rental.

However, I believe we are not so certain about losing Toshin as a tenant. Currently, there remains a master lease between Starhill and Toshin till year 2025. Next rent review is in Jun 2022.

Can they afford the rents in the next few years? I do think their cash burn is not insanely high like Airlines, as we can see in the income statement, the Cost of sales and expenses like Salaries scale pretty well according to the size of revenues. I do feel that they can sell land or properties to raise cash if the situation warrants it.

Takashimaya owns more than 600 billion yen worth of land and properties according to its financials - https://www.takashimaya.co.jp/base/corp/english/200706a.pdf. I do feel they are able to withstand COVID, even though their share price has taken a decline.


2. YTL Group
YTL Corporation Berhad Logo.svg
YTL Group is a malaysia conglomerate listed in Malaysia and Japan Stock Exchanges. Its stock price seems pretty resilient against COVID impact, last trading at $0.74 MYR.
According to KLSE website, YTL Group remains profitable throughout COVID crisis. You can view its financials in the picture below. In short, I think YTL is able to afford its rental to Starhill Global REIT.

3. Myer Pte Ltd
This segment consists of the rents collected from Myer Adelaide shopping Centre. This is not to be confused with Myer Stores in Australia.

Myer operates 60 department stores across Australia, and with our team members, we are committed to being Australia’s favourite department store. Our merchandise offer includes core product categories: Womenswear; Menswear; Childrenswear; Beauty; Homewares; Electrical Goods; Toys and General Merchandise.

Myer Department Store | Myer Centre AdelaideMyer Centre Adelaide sells for $288m | Adelaide Now

There is a Myer Store located in Myer Adelaide Centre. Myer Adelaide Centre is leased by Myer Pty Ltd under a master lease with Starhill Global REIT till 2032.

Myer Pty Ltd is a wholly owned subsidiary of Myer Holdings Limited, a listed company on Australia Exchange. You can view its stock price performance below.
From its 1H20 results for period ended Jan 2020, the business is profitable and seems to do just fine. Here is the report - http://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/MYR_HY2020_Results_Presentation.pdf.

Furthermore, from its latest COVID19 business update, it seemed to have already opened up almost all its stores. Looking at its balance sheet, it does not feel like the business is in a good state. Once again, I am not familiar with Australia financial reporting, nor retail business environment in Australia. You can judge for yourself below.

*1H20 is for period ended 25 Jan 2020.
4. David Jones Limited
I have traced David Jones Limited to be entity owned by Woolworths Holdings Limited. Woolworths Holdings Limited is a South Africa-based multinational retail company that owns the South African retail chain Woolworths, and Australian retailers David Jones and Country Road Group.

Let's take a look at Woolworths stock price performance for past 1 year!

This business does not seem to be in a good state with high leverage and has not been consistently profitable in the past 5 years. Here is a snapshot of its financials pre-covid. From the snapshot below, you can see that it is loss making in 2018 and 2019. Current ratio is below 1 too.

If you ask me, I would say it can fairly afford the rents to Starhill Global REIT.

Interesting structures in place for Starhill
One big factor that pulls me to invest in Retail reits is because of its diversified nature, and the ease to replace tenants. This is where Starhill is different from other retail reits like Capitamall or Frasers Centrepoint.

From Starhill, we are seeing multiple Master leases. And, as a novice investor, I feel it does not make economic sense for me to own something, and rent it to person A for him to rent it to person B. I believe I will be in a better state if I were to rent it directly to person B myself?

Pretty much the same reasoning why we buy online, in order to get things cheap, and they are cheap because the seller sell to us direct instead of through a middleman.

Still, while writing, I felt Starhill seem safe, because of the Master lease structures protecting keeping bulk of its spaces rented, and the contracts can even protect Starhill from negative rent revisions (at least for Toshin Master lease).

Through this article, we can see that a good portion of tenants for Starhill Global are in a dire state themselves if governments do restrict shoppers due to COVID-19. In the near future, things will still be fine according to the figures you see above.

This is my last article, and since I began, some REITs have proven (or are proving) to be COVID resilient. We are seeing Frasers Integrated REIT maintaining rental incomes.

Ascendas India REIT even increased their DPU. Why is this so? I believe strongly that it is due to tenancy.

You can see from below slide that Ascendas India REIT receives bulk of its income from IT related activities. More than half of its tenants belong to IT industry too. And we know, most IT business or Semicon businesses can thrive in the COVID environment.

I held this REIT from 1.25 range all the way up to $1.50 high since Mar 2020. It has since dropped back to the original price I bought it, and did not invest more into it. My mentor has told me to hold back and not add too much Office properties into my portfolio.

Now that financial results are out, I begin to sway towards focusing more on tenancies as a criteria to pick REITs too. I have a simple mind, and have always been like this. Not just that, we have to thinking according to the current context - COVID-19, and this is why I focused my blog on tenancies, and youtube videos on Debt Profiles first. the 2 most key criteria to me in this pandemic.

Analogically
If you follow my blog, you should know I am about to own a house, and I feel that I would not wish to rent to someone with a poorer financial standing (regardless of whether the tenants are good or bad people in this context). So, why should we invest into REITs with focused tenancies, worse, significant tenants that cannot afford your rents.



~Mr Llama

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