DBS Group Research analysts Geraldine Wong and Derek Tan have kept a “buy” rating on Starhill Global REIT with an unchanged target price of 75 cents.
“Starhill Global REIT stands out as one of the prime beneficiaries of a return of tourists,” write the analysts, seeing how the REIT’s tenant sales surged 5% above pre-Covid-19 levels in the latest quarter ended June.
With Singapore Tourism Board (STB) expecting inbound arrivals to trend higher in 2HFY2022 ended June, Tan and Wong expect the REIT to benefit from a return in tourist footfall and spending in the coming quarters.
On July 29, the REIT announced an FY2022 distribution per unit (DPU) of 3.80 cents, down 3.8% y-o-y and slightly behind estimates, according to analysts.
Starhill Global REIT also reported a full year revenue of $186.4 million up 2.8% y-o-y and net property income (NPI) of $144.7 million up 7.4% y-o-y.
The REIT’s FY2022 distributable income however was lower at $85.0 million down 2.7% from a high base.
See also: Test debug host entity
Tan and Wong say that the higher NPI was attributable to the cessation of rental rebates in Malaysia upon The Starhill’s completion, and lower portfolio expenses, partially offset by lower rental income from Wisma Atria Retail.
Moreover, Tan and Wong see a higher rental upside at Wisma Atria as asset enhancement (AEI) progresses and new anchor tenants open shops.
Approximately one-third of leases by gross rental income (GRI) at the mall will be due for renewal in the coming financial year, coinciding with the launch of key anchor tenants such as Haidilao and an upgraded interior.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
In addition, Wisma Atria tenant sales were at 105% of pre-Covid-19 levels in latest quarter, with capital structure highly hedged against hawkish rates with around 93% of debt fixed and around 17% of borrowings up for renewals in the next two years.
“We think the REIT is well positioned to capture higher reversionary rents in the coming year while concurrently refreshing its tenant mix, killing two birds with one stone,” say the analysts.
Additionally, Starhill Global REIT successfully joined the National Association of Real Estate Investment Trusts (NAREIT) Developed Asia Index in September 2021 alongside some changes in indexation rules.
“We believe this should enable the REIT to trade at a premium to historical valuations when tourists return in a bigger way,” Tan and Wong say.
Some risks the analysts consider include recessionary risks on retail consumption that may impact sales of luxury goods and impact the REIT’s tenant retail sales.
Overall, with the relaxation of Singapore’s border via the new vaccinated travel network (VTN), Tan and Wong believe that Starhill Global REIT will be one of the key beneficiaries amongst retail landlords to benefit from a return of tourists and pent-up spending on luxury goods.
“We note that only one quarter of ‘higher tourist flows’ was captured in this financial year in 4QFY2022, though Starhill Global REIT saw tenant sales at Wisma Atria surge to around 4.8% above pre-pandemic levels,” say Wong and Tan. “We are optimistic that the momentum from a return of tourist receipts will continue in the coming quarters, and reflect more strongly in FY2023.”
For more stories about where money flows, click here for Capital Section
At its current share price, the REIT’s stock offers around 6.6% and stands at a 100-basis points (bps) premium to its closest peer, the analysts say.
The research team at OCBC Investment Research is also keeping its "buy" call after Starhill Global REIT's 2HFY2022 results came in above its expectations.
The team has, however, lowered its fair value estimate to 64 cents from 65 cents previously after it made slight adjustments to its DPU forecasts. The adjustments took into consideration the REIT manager's comments, where it expects Starhill Global's DPU to be reduced by 0.04 cents (or 1% of the team's FY2023 DPU forecast) with every 100 bps increase in borrowing costs for its unhedged borrowings.
"While the Covid-19 situation remains fluid, we see firmer signs of reopening efforts in countries which Starhill Global REIT has exposure to, which we believe would support its recovery," the team writes.
"Given that master leases and anchor leases represent more than 50% of Starhill Global REIT’s gross rent, we believe this would partially mitigate the impact of rising utility costs and provide some income visibility to its unitholders," it adds.
As at 10.04am, units in Starhill Global REIT are trading flat at 60 cents.
Photo Credit: The Edge Singapore/Samuel Isaac Chua
