Higher interest rates and the weak Malaysian ringgit and Australian dollar have dampened Starhill Global REIT’s (SGREIT) outlook, say OCBC Investment Research analysts.
The REIT owns interests in Wisma Atria and Ngee Ann City, two trophy assets located at the heart of Orchard Road in Singapore. In total, SGREIT owns 10 properties in Singapore, Australia, Malaysia, China and Japan, valued at about $2.9 billion.
In a Nov 7 note, OCBC analysts are maintaining “buy” on SGREIT with a lower target price of 55 cents from 64 cents previously.
“While the Covid-19 situation remains fluid, we see firmer signs of reopening efforts in countries which SGREIT has exposure to, which we believe would support its recovery. Given that master leases and anchor leases represent more than 50% of SGREIT’s gross rent, we believe this would partially mitigate the impact of rising utility costs and provide some income visibility to its unitholders,” write OCBC analysts.
SGREIT reported 8.4% higher net property income (NPI) y-o-y at $37.2 million for the 1QFY2022/2023 ended September. Meanwhile, gross revenue totalled $47.6 million, 6.2% higher y-o-y.
As at Sept 30, the REIT’s committed portfolio occupancy stood at 96.9%. Its weighted average lease expiry (WALE) stood at 7.0 years by net lettable area (NLA), while gearing stood at 36.5%.
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The latest set of results were above OCBC’s expectations. “Growth was driven largely by lower rental rebates provided to tenants, coupled with the completion of asset enhancement works at The Starhill property in Malaysia, but partially offset by lower contribution from Wisma Atria and depreciation of the Australian dollar and Malaysian ringgit against the Singapore dollar.”
OCBC points to continued recovery in tenants’ sales at Wisma Atria, where overall portfolio occupancy increased to 95.8%. “Operationally, SGREIT’s Wisma Atria delivered a strong rebound in its shopper traffic and tenants’ sales by 40.7% and 37.1% y-o-y in 1QFY2023 due to a low base effect. We estimate that 1QFY2023 tenants’ sales have recovered to 85% of pre-Covid-19 levels.”
No rental reversion figures were disclosed, but OCBC believes this was likely still insipid given ongoing challenges faced by retailers on the cost and manpower front.
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According to data from CBRE Research, prime Orchard Road rents in Singapore rose 0.7% q-o-q in 3Q2022, the first increase since 3Q2018. SGREIT’s overall portfolio occupancy rose 0.4 percentage points (ppts) q-o-q to 95.8%, and the increase was broad-based across its geographies, note OCBC analysts.
Slight increase in gearing
With the proportion of borrowings hedged lower at 84%, SGREIT’s gearing inched higher to 36.5% as at Sept 30 from 36.2% as at June 30.
Its proportion of borrowings hedged declined 9 ppts q-o-q to 84%, while average interest rate increased by 12 bps q-o-q to 3.3%.
OCBC analysts are lowering FY2023 and FY2024 distribution per unit (DPU) forecasts by 5.8% and 6.5%, respectively, on higher interest rate and weaker MYR and AUD assumptions. “We also raise our risk-free rate from 3.25% to 3.5%, and lower our terminal growth rate from 1% to 0.5% due to a weaker economic outlook.”
As at 9.59am, units in Starhill Global REIT are trading 0.5 cents lower, or 0.95% down, at 52 cents.
