DBS: Starhill Global REIT – Buy Target Price $0.75

Shoppers back in Orchard!

• FY22 distributable income was lower at S$85.0m (-2.7%) from a high base, DPU of 3.80 Scts behind estimates 
• Key positives: (i) Wisma Atria tenant sales at 105% of pre-COVID levels in latest quarter, (ii) Capital structure highly hedged against hawkish rates with c.93% of debt fixed and c.17% of borrowings up for renewals in the next 2 years
• Key negative: Portfolio valuation declined by 2.4% y-o-y from Wisma Atria’s devaluation and currency impact
• Maintain BUY, with TP of S$0.75, stock offers 6.6% yield

(-) SGREIT announced full year (FY22) DPU of 3.80 Scts, slightly behind estimates

• SGREIT reported full year revenue of S$186.4m (+2.8% y-o-y) and NPI of S$144.7m (+7.4% y-o-y).
• Higher NPI was attributable to the cessation of rental rebates in Malaysia upon The Starhill’s completion, and lower portfolio expenses, partially offset by lower rental income from Wisma Atria Retail and depreciation of AUD. 
• Full year distributable income of S$85.0m (-2.7% y-o-y) is post income retention of S$4.8m on a full year basis for working capital purposes; DPU of 3.8Scts on a 95% payout ratio. 
• The lower distributable income on a y-o-y basis was also due to a higher base in FY21 from the release of S$7.7m deferred income during the pandemic year. 
• Thus, full year DPU of 3.80Scts was 3.80% lower y-o-y. 

(+) Portfolio occupancy at 95.4% supported by higher h-o-h occupancy from Singapore office.

• Portfolio occupancy as at 30 June 2022 was at 95.4% (-0.9ppt y-o-y), led by a decline in Australia (-3ppts y-o-y to 91.3%) and partly offset by higher occupancy in Singapore (+1.4 ppts to 96.4%).
• Master and anchor leases with rent review made up c.53% of gross rents for the financial year. 
• c.10.8% of retail leases by GRI will be up for renewal in FY23. 
• Rental assistance across the portfolio decreased y-o-y to S$4.9m for the full financial year. 
• Portfolio lease expiry stood at 7.2 years by NLA and 4.7 years by GRI respectively. 

(+) Tenant sales at 105% of pre-COVID levels in the latest quarter 

• With the relaxation of Singapore’s border via the new Vaccinated Travel Network, SGREIT will be one of the key beneficiaries amongst retail landlords to benefit from a return of tourists and pent-up spending on luxury goods. 
• We note that only one quarter of ‘higher tourist flows’ was captured in this financial year i.e. 4QFY22. SGREIT saw tenant sales at Wisma Atria surge to c.4.8% above pre-pandemic levels (4Q FY19).  
• We are optimistic that the momentum from a return of tourist receipts will continue in the coming quarters, and reflect more strongly in FY23.
• Singapore Tourism Board (STB) expects inbound arrivals to land between 4 to 6 million this year, from c.1.5m arrivals recorded in 1HCY22, which would mean higher q-o-q inbound traffic going into 2HCY22.
• Retail reversions are understood to be in negative territory, while tenant sales and shopper footfall are pointing upwards. GTO (gross turnover) [JKS1] income and higher passing rents will continue to play catch up. 

(-) Decline in valuation of Wisma Atria and currency impact

• SGREIT’s portfolio valuation ended the year at S$2.89 billion or a 2.4% decline y-o-y.
• This was mainly led by the downward revaluation of Wisma Atria Property (Retail), which saw a 4.6% decline in valuation y-o-y and net movement in foreign currencies from SGREIT’s exposure in Malaysia (-1.4% y-o-y) and Japan (-15.9% y-o-y).

(+) Stable capital management with c.17% of borrowings due for renewal in the next 2 years

• Around 93% of SGREIT’s borrowings are hedged on fixed rates as at 30 June 2022 with a weighted average debt expiry of 3.5 years. 
• Gearing levels remain stable at 36.2%. 
• Approximately S$125m and S$60m of loan facilities will be up for renewal in FY23-24, representing 11.5% and 5.5% of total borrowings outstanding. 
• A 100 bps increase in floating benchmark rates across all markets will lead to a 0.04Scts p.a. decline in DPU or – 1% impact on DPU, on current unhedged portion of loan. 

Maintain BUY with TP of S$0.75. We maintain our BUY rating on SGREIT with catalysts from higher tourist inflows and retail spending. We have a new TP of S$0.75 as we roll forward valuations into FY23 and assume higher interest rates of 15-20 bps in the coming 2 financial years.