RHB Group Research analyst Vijay Natarajan has maintained his “buy” call with an unchanged target price of 68 cents on Starhill Global REIT, as he thinks the REIT will see better prospects from the return of high end tourists.
In a Sept 9 note, Natarajan says that the REIT has “demonstrated resilience” despite the Covid-19 impact. This was done via a combination of stable master leases, which make up about 53% of rent and active lease management.
Furthermore, the return of high-end leisure tourists will benefit Starhill’s Orchard retail portfolio, while long master leases at overseas assets provides income stability.
Specifically, its Orchard malls are set to benefit from the return of Indonesian visitors, as tourists account for 20-30% of the overall tenant sales at Wisma Atria pre-Covid-19, based on management estimates.
Singapore tourism saw a sharp recovery since 2Q2022, with visitors in July recovering to 40% of pre Covid-19 levels. Notably, Indonesia is now the top visitor arrival market for Singapore, standing at about 17% as of July.
Natarajan says that past anecdotal evidence shows that high-end tourists from Indonesia prefer to stay and spend more in the Orchard area vs visitors from other countries. “This should have a positive effect on tenant sales at its Orchard malls which accounts for nearly half of its income.”
He notes that already in Starhill’s 4QFY2022 ended June, tenant sales at Wisma Atria were 4.8% above its pre Covid-19 level, though the recovery is uneven across various trade sectors.
On the rents front, Starhill’s portfolio rents still remain negative, but management has noted it has been improving from double digit negative rent reversion seen in previous quarters.
“With tenant sales recovering, we expect rent reversions to narrow and be flattish in FY2023,” Natarajan highlights, adding that “rent rebates, which stood at $4.8 million in FY2022, should also taper off to below $1 million for FY2023.”
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Committed occupancy for Starhill’s retail portfolio remains relatively stable at 96.7%, and occupancy at its Singapore office portfolio has been steadily improving and stands at 93.4%, up 1.9 percentage points q-o-q.
Furthermore, a high proportion of fixed rates (93%) shields it from rising interest rates, with every 100 basis points increase in interest rates resulting in just a marginal 1% impact on its distribution per unit (DPU).
Natarajan does point out though, that Starhill has $125 million of medium term notes (MTN) due for refinancing in FY2023 at an existing coupon of 3.4% per annum, adding that management expects a slight increase of 60 basis points in interest cost on this. These MTNs make up 12% of Starhill’s total debt.
With regards to utility charges, the analyst says these account for about 4% of overall expenses. Assuming a doubling of rates, this will have a “manageable” 2% DPU impact.
Finally, Natarajan says a modest gearing of 36.2% presents $150-$200 million of debt headroom for opportunistic acquisitions likely in overseas markets, noting that management has a preference to increase its office exposure.
As of 2.29 pm, shares of Starhill Global REIT were trading at 58.5 cents, with a FY2023 P/B ratio of 0.74 and dividend yield of 6.8%.=
