Starhill Global REIT - OCBC Investment 2021-08-05: Some Positives, But Longer-term Uncertainties Linger

STARHILL GLOBAL REIT (SGX:P40U)

Starhill Global REIT - Some Positives, But Longer-term Uncertainties Linger

Starhill Global REIT's 2HFY21 DPU jumped 195.7% y-o-y due to release of deferred distributable income.
Improvement in portfolio occupancy but rents still soft.
Uncertainties over longer-term outlook.

Starhill Global REIT (SGX:P40U)’s 2HFY21 results came in above our expectations. Gross revenue rose 10.5% y-o-y to S$92.9m, while NPI jumped 20.2% to S$69.8m. DPU surged 195.7% y-o-y to S$0.0207 due to a low base, as management had deferred S$7.7m of distributable income in 2HFY20 during the height of the COVID-19 pandemic. S$4.6m of this was released in 2HFY21. Excluding the effects of the deferred distributable income, adjusted DPU would still have increased 77.1% to S$0.0186.
For the full-year, Starhill Global REIT’s FY21 NPI increased 2.0% to S$134.7m, while DPU was up 33.4% to S$0.0395 (or +8.8% to S$0.0360 if we exclude the effects of deferred income), which was 6.2% above our forecast.

Starhill Global REIT’s portfolio occupancy rose 0.8 percentage points q-o-q to 96.3%. This was led by a significant improvement at Wisma Atria (retail) (+11.1 ppt q-o-q to 96.5%), and slight increases at Ngee Ann City (office) and Myer Centre Adelaide. However, rental reversions were negative, coming in at -11% for retail and -6% for office in FY21.
Given that passing rents at Wisma Atria (retail) remain relatively high within the Orchard Road precinct, we see room for further negative rental reversions in FY22.
Given the impact from the Phase 2 (Heightened Alert) and continued border restrictions, Wisma Atria (retail)’s FY21 tenants’ sales and shopper traffic were still 28.7% and 48.0% below FY19 (pre-pandemic) levels, respectively. Management remains open to acquisitions, and would preferably look to increase its office exposure to ~50% of its revenue over the next three to five years, versus 14.2% currently for 2HFY21.

Starhill Global REIT’s near-term outlook will continue to be shaped by developments over the COVID-19 situation. Over the longer-term, we believe there are also uncertainties, such as
1. work-from-home impact on the office sector,
2. management’s intention for its Ngee Ann City Property when the Toshin master lease expires in Jun 2025, and
3. viability of departmental stores in the long-run.
After adjustments, which include raising our FY22F and FY23F DPU forecasts by 0.2% and 1.9%, respectively, and applying an ESG valuation discount, our fair value estimate for Starhill Global REIT inches up from S$0.59 to S$0.60.
See

Starhill Global REIT’s overall corporate governance practices trail those of its global and home market peers, particularly in board structure. However, it scores better in the category of ‘Opportunities in Green Building’, with Starhill Global REIT engaging with its tenants to improve on the operational efficiencies of its properties.
~30% of Starhill Global REIT’s overall portfolio is certified by recognised green building standards, which is higher than the industry average of 25% as of FY19.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-08-05

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