Starhill Global REIT - OCBC Investment 2017-11-01: Softness Likely To Persist In Near-term

STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Softness Likely To Persist In Near-term

Starhill Global REIT (SGREIT) reported a weak set of 1QFY18 results but this met our expectations.
Gross revenue and NPI fell 4.1% and 3.5% YoY to S$53.0m and S$41.4m, respectively. The decline was largely attributed to poor performance from its Singapore office portfolio and a one-off pre-termination rental compensation for a retail lease at Wisma Atria amounting to S$1.9m recorded in 1QFY17. Excluding this, Wisma Atria’s retail segment would have delivered revenue and NPI growth of 1.4% and 6.4% YoY, while overall gross revenue would have decreased by a smaller magnitude of 0.6% and NPI would have increased by 0.9%.
DPU dipped 7.7% YoY to 1.20 S cents even though management retained a smaller amount of income available for distribution (S$548k versus S$1.1m in 1QFY17). This constituted 23.9% of our FY18 forecast.

Operationally, SGREIT’s office portfolio suffered a big dip in occupancy by 11.2 ppt YoY and 9.4 ppt QoQ to 83.5%, mainly due to Ngee Ann City (- 14.6 ppt YoY and -15.6 ppt QoQ to 77.9%). This resulted in a 15.0% YoY decline in NPI to S$4.3m.
SGREIT highlighted that it is currently in the process of finalising terms with prospective tenants for approximately one-third of the vacant spaces. Notwithstanding this development, downtime is expected given the fit-out period for new tenants, while rental pressures are also likely to persist.
Overall portfolio occupancy was 93.4%, down 2.1 ppt from the previous quarter. Wisma Atria (retail) saw higher tenant sales of 1.3% YoY despite a 3.1% fall in shopper traffic. Consumer sentiment appears to be more upbeat, while enquiries have also seen an improvement, although the overall landscape still has pockets of uncertainties.

We lower our FY18 and FY19 DPU forecasts by 3.1% and 3.8%, respectively, as we cut our occupancy projections for SGREIT’s Singapore office assets and Myer Centre Adelaide. We also raise our cost of equity assumption from 8.0% to 8.2% as we expect SGREIT’s outlook to remain challenging in the near future. Correspondingly, our fair value estimate dips from S$0.82 to S$0.77.
Given limited upside potential from our revised fair value, we downgrade SGREIT to HOLD.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-11-01

OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 0.77 Down 0.820