RHB Group Research has upgraded its call on Starhill Global REIT (SGREIT) to “buy”, with a new target price of 56 cents from 55 cents previously, on the backing of more resilient operating metrics for its Singapore portfolios, and a “healthy financial position”.
Analyst Vijay Natarajan says that the REIT’s 2HFY2022/2023 ended June 30 results were slightly ahead of his expectations.
Natarajan notes that the REIT’s Singapore assets have rebounded nicely, with stronger rent growth seen for both its retail asset and office assets since the start of the year.
Wisma Atria retail saw a low-single digit rent reversion, reversing from negative rent reversions in the past few years and is expected to continue, says Natarajan.
Meanwhile, Starhill’s office portfolio saw much stronger positive rent reversions in the low teens with demand stemming from family offices and luxury retailers.
“Looking ahead, SGREIT will focus on steadily improving average rents for Wisma Atria which has declined by about 25% from its peak to about $25 per square foot. This will be done through the introduction of new international brands and concepts as well as targeted asset enhancements,” the analyst adds.
In addition, negotiations for the Toshin master leases which are due for expiry in June 2025 are progressing well. Toshin occupies about 24% of the REIT’s gross rent, and the analyst notes that extension and rental terms are likely to be better than existing terms.
He adds that the management is also concurrently assessing the option of operating the space on its own in order to evaluate the best deal for unitholders.
“A likely positive outcome could remove uncertainties and act as a positive nearterm re-rating catalyst, in our view.” says Natarajan. “Similarly, on Myer’s arbitration claim, the REIT sees limited financial downside from the leases.”
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SGREIT is also in a healthy financial position, with a “modest” gearing at 36.7% post recent divestment of Daikanyama, Japan, at a healthy premium of 39% to its latest valuation.
More importantly, the analyst notes, about 84% of its debts are hedged with no immediate debt refinancing needs until 2HFY2024, placing it in a better position against rising interest rates.
“Management will selectively look at good quality office assets in the medium-term for acquisitions and is also open to divesting its Australian assets at the right opportunity,” he says.
However, Natarajan notes that SGREIT has had a slight decline in its overall portfolio value of about 4%, mainly from its Australian properties (-15% y-o-y) on the back of cap rate expansion, rental softening, foreign exchange impact and Malaysia assets from exchange rate decline.
With that, the analyst has raised his FY2024-FY2025 distribution per unit by 4% and 3%, by tweaking higher occupancy assumptions and fine-tuning interest cost.
“Our environmental, social and governance (ESG) score is raised up a notch to 3.2 (out of 4.0) based on our updated ESG scoring methodology. We have thus applied a 4% ESG premium to derive target price,” he says.
As at 12.50pm, shares in SGREIT are trading 0.5 cents higher, or 1.01% up at 50 cents.
