Starhill Global REIT is on “firm footing” following the July 29 release of its results for FY2024 ended June 30, says RHB Bank Singapore. The retail- and office-focused REIT has navigated the high interest rate environment well, with steady operational improvements and active debt management, says RHB analyst Vijay Natarajan.
In an Aug 26 note, Natarajan is staying “buy” with a lower target price of 57 cents from 58 cents previously. This target price includes a 2% ESG premium based on RHB’s proprietary methodology.
Starhill Global REIT’s “mid-high single-digit rent reversion for Singapore retail and office assets are expected to continue in FY2025”, says Natarajan. “Tenant sales and shopper traffic at Wisma Atria rose 7% and 13% — better than peers — indicating an uplift from asset enhancements and the new [Thomson-East Coast Line] MRT opening.”
Asset enhancements for Wisma Atria were completed in 1H2024 with the modernisation of interior works and widening of the entrance portal to the MRT system, which has resulted in increased traffic flow to the mall. Starhill Global REIT P40U is also exploring the conversion of some of the car park areas into retail spaces to unlock value.
New retail tenants include a mix of new-to-market fashion brands, jewellery and F&B players, while office demand came from luxury retailers and medical tenants. Portfolio committed occupancy saw a slight q-o-q dip, down 0.3 percentage points (ppts) but remains high at 97.7%.
The REIT’s portfolio valuation remains stable, down 0.2% y-o-y, with a slight uplift to Ngee Ann City’s valuation post the signing of new Toshin Development Singapore master leases, offset by a decrease in Australian assets from the cap rate expansion as well as foreign exchange weakness.
See also: Starhill Global REIT's FY2024 DPU declines by 4.5%
Toshin is the master tenant occupying all the retail areas of the Ngee Ann City property. The master lease will expire in June 2043.
“With rate cuts around the corner, we believe valuations have bottomed out,” says Natarajan.
Starhill Global REIT’s “modest” gearing of 36.8% provides room for selective accretive acquisition opportunities, says the RHB analyst. “Management has indicated its preference for office assets in markets such as Japan and Australia at the right price and opportunity. It also remains open to divest office strata lots at Wisma Atria at a good price, in order to recycle capital.”
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Currently, Starhill Global REIT’s office portfolio accounts for approximately 15% of its overall revenue. Natarajan believes this could increase to 30%-50% in the medium term.
According to Natarajan, financing costs are likely to peak at approximately 4% (currently 3.8%), with 79% of its debt currently hedged.
As at June 30, the REIT’s portfolio in Singapore consists of Wisma Atria and Ngee Ann City. The portfolio’s foreign assets in Australia, Malaysia, Japan and China are retail assets Myer Centre Adelaide, David Jones Building and Plaza Arcade, The Starhill, Lot 10, Ebisu Fort and a four-storey mixed-use commercial complex in Chengdu.
“Operational strength should continue with positive rent growth for both retail and office, along with stable occupancy,” writes Natarajan. “2HFY2024/FY2024 results were slightly below estimates due to higher tax expenses.”
Natarajan has lowered his FY2025-2026 distribution per unit by 2%-3%, “mainly by adjusting for higher tax rates and slightly higher operating costs”. “About 63% of the portfolio by net lettable area is green-certified, up from 40% last year and on track for the 70% target by 2030.”
