In its latest FY2021 ended June results, Starhill Global REIT (SGREIT) recorded a 33.4% y-o-y increase in DPU to 3.95 cents. This came on the back of a slight 0.3% y-o-y increase in gross revenue to $181.3 million, bringing net property income to $134.7 million, 2.0% higher than last year.
The REIT’s results came in exceeding most analysts’ forecasts. With that, DBS Group Research, RHB Group Research and CGS-CIMB Research are keeping their “buy” recommendations on the stock with target prices of 75 cents, 68 cents and 71 cents respectively.
DBS lead analyst Dale Lai notes that earnings for FY2021 exceeded forecasts, thanks to lower portfolio waivers granted alongside a strengthening AUD. Full-year reversion was at -11% for the retail portfolio, in line with expectations for Orchard rents.
“Given that market has likely bottomed, we anticipate reversions to normalise back to zero in the coming quarters. Despite a run-up in the share price in July, the stock continues to offer yields at about 6.4% and at a 100 bps premium to its closest peer,” says Lai in an Aug 4 report.
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Meanwhile, he expects higher rental upside at Wisma Atria as its asset enhancement initiative (AEI) progresses and its new anchor tenant opens it shop. Approximately one-third of leases (by GRI) at the mall will be due for renewal in the coming financial year, coinciding with the launch of key anchor tenants (Haidilao) and an upgraded interior. “We think that SGREIT is well positioned to capture higher reversionary rents in the coming year while concurrently refreshing the tenant mix, killing two birds with one stone,” he adds.
Furthermore, the recent changes in indexation rules for the EPRA NAREIT Developed Asia Index puts SGREIT in the front seat for possible inclusion in the upcoming September review. “We believe this will lead to an inflow of funds, driving a re-rating, leading to the REIT trading at a premium to historical valuations,” says Lai.
As for RHB, it too likes the stock for its cheap valuations. “Despite a challenging outlook, we believe the negatives are largely priced in, with the REIT being one of the cheapest among S-REITs in P/BV terms, at 0.7 times (sector average: 1.2 times),” says the RHB research team.
It also likes that valuation for the stock has risen some 0.8% y-o-y as the 5.8% drop in Wisma Atria’s valuation was more than offset by the valuation increase for Malaysian (long master lease) and Australian assets (AUD strengthening).
AEI works for Wisma Atria, with a capex of $15 million, are underway to upgrade common space, lift lobbies and toilets – these should be completed by end-2022, with minimal disruptions to the mall expected. AEI works for The Starhill in Kuala Lumpur is also on track to be completed by year-end.
In the FY2021 period, the REIT’s portfolio occupancy rate rose by 0.8 percentage points q-o-q to 96.3%, exceeding RHB’s expectations, mainly due to occupancy rate improvements at its Singapore malls.
“Tenant sales, which were recovering closer to 80% of pre-pandemic levels in April, however, plunged to 50% in June. This is expected to remain at similar levels in July and August, before an anticipated recovery later this year. Its office portfolio has stayed relatively steady, with new demand mainly from medical establishments, aesthetics and luxury retailers,” says the research team.
Looking forward, RHB expects to see overseas office asset acquisitions in FY2022. It notes that management is actively looking at office assets in markets such as Japan and Australia, with a medium to long-term target of 50% revenue from the office segment (currently 14%). Gearing is currently comfortable at 36.1%, with over $300 million of debt headroom for acquisitions (assuming a 45% cap).
For CGS-CIMB, lead analyst Eing Kar Mei remains positive on the stock but is cautious of near-term pressures.
SGREIT’s overall portfolio occupancy remained stable at 96.7% in FY2021, with the Singapore portfolio coming in at 99.3% for retail and 91.5% for office, while Australia portfolio remained stable at 93.8%.
However, lower rental rebates helped offset the impact of lower occupancy at Wisma Atria but tenant sales and traffic dropped to 50% (from 80% in Apr) and about 40% (from about 60%) of pre-Covid 19 level in June, respectively, affected by Phase 2 Heightened Alert in Singapore. “Rental reversions for Wisma Atria/SG office were -11%/-6% respectively in FY2021, and we expect near-term pressures to persist,” says Eing.
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However, she believes that the impact should be manageable as only 15% of leases by GRI expire in FY2022. It may need to provide additional rental rebates in FY2022, especially if mandated by the Singapore government.
“We expect a gradual relaxation of restrictions and border reopenings to help drive sales and shopper traffic towards recovery to stabilise rental reversions,” she adds.
On the other hand, OCBC Investment Research has a "hold" call on SGREIT with a target price of 60 cents.
In an Aug 5 report, the OCBC research team says, "While there are some signs of recovery from the Covid-19 pandemic, we believe there still exists uncertainties and a lack of earnings visibility ahead. Although some of SGREIT’s properties are under master leases, the severe and widespread impact of Covid-19 has resulted in management extending, or having the intention to extend some form of rental rebate to its master lessees to share the pain and build a stronger longer-term relationship."
SGREIT’s near-term outlook will continue to be shaped by developments over the Covid-19 situation. Over the longer-term, the research team believes that there are also uncertainties, such as work-from-home impact on the office sector; management’s intention for its Ngee Ann City property when the Toshin master lease expires in Jun 2025; and viability of departmental stores in the long-run.
As at 3.00pm, units in SGREIT are trading at 62 cents or 0.74 times FY2022 book with a dividend yield of 6.75%.
Photo: Starhill Global REIT
