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

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

  • 1QFY18 DPU dipped 7.7% YoY.
  • Poor quarter for office assets.
  • Paring forecasts; downgrade to HOLD.

1QFY18 results met our expectations 

  • 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.

Significant dip in Singapore offices’ occupancy 

  • 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.

Downgrading to HOLD 

  • 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