Starhill Global REIT - DBS Research 2020-02-04: Turning Headwinds Into Tailwinds


Starhill Global REIT - Turning Headwinds Into Tailwinds

  • DPU of 1.13 Scts was flat y-o-y, and 1HFY19/20 DPU makes up c.97% of our full-year forecast.
  • Starhill Gallery continues to take a toll on top and bottom lines as the asset is being future-proofed.
  • Overall portfolio performance remains healthy, with a 20-bp rise in occupancy rate to 96.5%.
  • Wisma Atria was the star of this quarter, with tenant sales growing 13.0% y-o-y.


DPU marginally below as Starhill Gallery undergoes major refurbishment

  • Starhill Global REIT (SGX:P40U)’s 2QFY20 revenue and NPI of S$48.7m and S$37.2m was a 4.5% and 5.9% dip y-o-y respectively. See Starhill Global REIT Announcements. This was mainly due to rental rebates extended to the master tenant in Starhill Gallery as the asset undergoes redevelopment.
  • Excluding Starhill Gallery, revenue and NPI for Starhill Global REIT portfolio in 2QFY20 would have been stable, declining marginally by 0.4% and 0.6% over 2Q FY18/19 respectively. This mainly came from the weakening AUD coupled with a dip in revenues from its Singapore office properties due to lower occupancy rates at Ngee Ann City.
  • Reported DPU of 1.13 Scts for the quarter was flattish y-o-y, bringing 1HFY20 DPU to 2.26 Scts, which makes up 45% of our forecasts.

Rental rebates at Starhill Gallery (Malaysia) due to ongoing refurbishment works

  • For Malaysia, revenue and NPI in 2Q FY19/20 were lower by 27.5% and 28.4% y-o-y respectively, as Starhill Gallery undergoes AEI works and redevelopment into an integrated development.
  • The decline is mainly due to the loss in rental income as part of the mall is phased out for AEI, which is scheduled for completion by the end of next year (2021 or 1HFY22) and will be renamed “The Starhill” upon completion.
  • Rental rebate is extended to Starhill Global REIT by sponsor (50% of annual rental of RM52m) and will be given for the first two years of its construction (up to June 2021).

Other key markets remain healthy

  • Higher revenue and NPI contributions from the Singapore retail (Revenue and NPI for 2Q FY19/20 rose by 1.5% and 1.4% y-o-y respectively) component neutralised the lower contributions from the Singapore office (revenue and NPI were lower by 6.4% and 8.7% y-o-y respectively) component.
  • Wisma Atria demonstrated an uplift in popularity as tenant sales grew 13.0% y-o-y for the quarter, despite a 3.7% y-o-y fall in footfall traffic.
  • As at 31 December 2019, Wisma Atria and Ngee Ann City stood at an occupancy of 100% and 99.4% respectively. Office occupancy at Ngee Ann City dipped from 93.6% to 89.2% q-o-q due to the pre-termination of a single tenant, while that for Wisma Atria rose from 87.7% to 91.3% for the same period.
  • Australia assets posted stronger operational performance but reported a y-o-y decline from a weaker AUD with revenue and NPI declining 3.4% and 4.8% y-o-y respectively. From an operational standpoint, occupancies rose for both Perth properties (97.6% to 98% q-o-q) and Myer Centre Adelaide (90.0% to 92.6% q-o-q).
  • Revenue and NPI from Starhill Global REIT’s China and Japan properties inched up 1.1% and 2.3% y-o-y with full occupancies for the two Japanese assets.

Future-proofing of Starhill Gallery

  • Competition within the mid-to high-end retail in Kuala Lumpur is likely to intensify, with retail supply within a 10-km radius from Starhill Gallery and Lot 10 increasing by approximately 31% over a 5-year period to 27m sqft in 2023.
  • The ongoing two-year asset enhancement initiative will aim to refresh the interior retail space with a modern and contemporary design and convert the upper three floors into hotel rooms, a necessary step forward to maintain Starhill Gallery’s position as a prime mall within Kuala Lumpur.
  • The master lease arrangement within Starhill Gallery and Lot 10 will be extended by another 19.5 years and 9.0 years respectively from June 2019.
  • Income visibility is greatly enhanced with rents estimated to be 1.5% higher, with in-built periodic rental escalations of 4.75-6.0% in every three-yearly reviews, extending the long-term trajectory of the asset.

Portfolio and financial metrics remain robust

  • Overall portfolio occupancy inched up 20 bps to 96.5% for the quarter, while portfolio WALE remains very well-staggered at 9.1 and 5.9 years (by NLA and gross rent respectively), extended by the Toshin master lease, master tenancy agreements for Malaysia Properties and the anchor leases in Australia and China. There remains a good mix between master anchor leases and actively managed leases at a proportion of 49:51.
  • Only 3.3% and 6.0% of leases by NLA and gross rent respectively will be expiring in the remaining two quarters of FY19/20.
  • Gearing and cost of debt stood at 36.3% and 3.29% respectively, with 89% of borrowings hedged on a fixed rate.

Transitional phase with Malaysia redevelopment; maintain BUY.

  • We like Starhill Global REIT for its diversified earnings base supported by c.49% of revenues pegged to stable long-term leases with periodic rent reviews. This should help weather against a potential dip in tourist arrival receipts within the Singapore malls following the coronavirus outbreak.
  • Yields are attractive at north of 6.1% within minimal downside risk. See Starhill Global REIT Dividend History.

Exposure to actively managed retail leases limited to just 25% of gross rents.

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-02-04
SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800