A sharp fall in retail footfall and subsequent rental rebates have battered Starhill Global REIT (SGREIT), with OCBC Investment Research analysts warning of a “tough and winding road ahead” in a July 29 note.
The REIT’s 2HF2020 results missed OCBC’s expectations with gross revenue and net profit income (NPI) falling 18.5% and 27.0% y-o-y to $84.1 million and $58.0 million respectively. Distribution per unit (DPU) dipped 68.2% to 70 cents.
Despite that, OCBC is still recommending investors to “buy” on the REIT, with a fair value of 53 cents.
“We believe there are significant uncertainties and 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,” says OCBC.
Starhill Global REIT owns interests in Wisma Atria and Ngee Ann City, two trophy assets located at the heart of Orchard Road in Singapore. It also has income streams from overseas markets, such as Australia, China, Malaysia, and to a smaller extent, Japan.
With the pandemic and subsequent circuit breaker, tenant sales and footfall traffic at Wisma Atria fell 80.0% and 86.9% y-o-y in 4QFY2020 respectively. Shopper traffic recovered to close to 50% of last year’s level in July, with sales at a slightly better level
For FY2020, SGREIT’s NPI slipped 17.1% to $132.1 million as it provided $17 million of rental assistance from its own pocket to eligible tenants to cushion the impact from Covid-19, including allowance for rental arrears. Approximately one-third of the rental rebates were for tenants in Australia and the remainder in Singapore, says OCBC.
That said, CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee note that SGREIT’s portfolio actual occupancy remained high at 96.2% while retail occupancy was 97.4%. Singapore retail portfolio registered an actual occupancy of 98.8% as at Jun 2020 with Ngee Ann City being fully occupied.
“On a committed basis, Singapore retail portfolio occupancy is high at 99.5%. SGREIT’s assets in Singapore and Malaysia have resumed operations while retail tenants in Australia and China have also reopened their stores,” say Eing and Lock. CGS-CIMB is maintaining its “add” call on SGREIT, with a raised target price of 70.6 cents.
However, OCBC analysts are cautious on occupancy rates ahead, as Wisma Atria has 29.6% of its gross rent expiring in FY2021. Rental reversions are likely to come in negative as management seeks to defend its occupancy.
Portfolio valuation declined by approximately 4% y-o-y mainly due to downward revaluation of SGREIT’s Australian properties (-19.4%) and Wisma Atria (-4.6%), says CGS-CIMB. “The decline in valuation was largely due to lower passing rent and market rents in view of the softer retail outlook which was impacted by Covid-19.”
The lower valuation, coupled with the increased borrowings to part finance the asset enhancement initiative (AEI) at Starhill Gallery and build cash balance to enhance liquidity in view of Covid-19, led to gearing increasing from 36.7% in the last quarter to 39.7%, say Eing and Lock. SGREIT has available undrawn committed revolving credit facilities which is in excess of the maturing debts.
“We believe the market has priced in the potential impact from Covid-19. Our FY2021-2023F DPU is adjusted by -1.4% to +0.5% as we update our numbers based on its full-year numbers,” says CGS-CIMB.
As at 12.19pm, units in Starhill Global REIT are trading at 0.5 cents lower, or 1.06% down, at 46.5 cents.
