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Why Starhill Global REIT’s 9.5% Decline in Distributions Is Not as Bad as It Seems

Starhill Global Real Estate Investment Trust (SGX: P40U), or SGREIT, had just released its first quarter results yesterday evening.

Currently, the REIT’s real estate portfolio comprise of interests in Wisma Atria and Ngee Ann City (both are found along the famous Orchard Road shopping belt in Singapore), Starhill Gallery and Lot 10 in Kuala Lumpur, Malaysia, the David Jones Building and Plaza Arcade in Perth, Australia, Renhe Spring Zongbei in Chengdu, China, and five properties in the prime areas of Tokyo, Japan.

For the quarter, gross revenue had dipped by 8.3% year-on-year to S$49.2 million while net property income (NPI) was at S$39.1 million, a decrease of 6.7%. The declines were mainly due to the one-time receipt in the first quarter of 2013 of accumulated rental arrears (i.e. overdue rents) net of expenses from the Toshin master lease.

Excluding the one-off gain, the revenue and NPI for the latest quarter would have been 1.8% and 2.5% higher year-on-year respectively, driven mainly by strong performance in its Singapore portfolio and a full-quarter of contribution from Plaza Arcade which was acquired in the first quarter of 2013.

Income to be distributed to unitholders in the latest quarter was S$26.7 million, 0.3% higher than that of S$26.6 million seen a year ago. Distribution per unit (DPU) was 1.24 cents, 9.5% lower compared to the 1.37 cents achieved last year. However, excluding the one-off gain of 0.19 Singapore cents per unit due to the Toshin rental arrears in the corresponding quarter a year ago, the latest DPU would have been some 5.1% higher.

SGREIT’s Singapore portfolio made up most of the REIT’s total revenue for the first quarter at 66.9%. Wisma Atria and Ngee Ann City saw positive rental reversions and high occupancies for both their retail and office units. Wisma Atria Retail clocked an 8.9% rental reversion (the adjustment of rents to reflect market conditions), while the Singapore office portfolio achieved positive rental reversion of 11.7%. The Singapore office portfolio had maintained a high occupancy rate of 99%.

In March this year, SGREIT divested Holon L in Tokyo for ¥1.03 billion (around S$12.8 million), a 6% premium to the latest independent valuation of the property as of 31 December 2013. The divestment is part of its ongoing strategy to refine its portfolio. Japan is currently SGREIT’s smallest geographical market, contributing to less than 3% of the REIT’s first quarter total revenue.

As of 31 March 2014, the REIT’s gearing ratio stood at 29.6%, a slight increase from the 29% seen three months ago. To put things into perspective, Suntec REIT (SGX: T82U), another retail and office REIT, has a much higher a gearing ratio of 37.3%.

The average debt maturity and average interest rates for SGREIT’s borrowings were at 3.2 years and 3.03% respectively.  All of its borrowings are currently fully fixed and/or hedged via interest rate swaps and caps, an improvement from having 94% of loans having fixed and/or hedged rates in December 2013. The net asset value per unit at the end of the quarter came up to S$0.94.

Tan Sri Dato’ (Dr) Francis Yeoh, Executive Chairman of SGREIT’s manager commented on the first quarter results:, “SGREIT continued to benefit from the strong performances of its Singapore and Australia portfolios in the first quarter. During the quarter, SGREIT divested another property in Tokyo as part of our efforts to further refine the portfolio. Since the beginning of 2013, SGREIT has divested approximately S$22 million of noncore assets and invested approximately S$60 million to strengthen its portfolio of prime retail assets in the Asia Pacific region.”

Yeoh added, “Looking ahead, the Asian economies should continue its growth trajectory as they leverage on the progressive recovery in most advanced economies. Against this backdrop, we will continue to create value for Unitholders through active asset management efforts and source for yield accretive acquisitions of prime assets in our core markets, while maintaining our proactive capital management approach.”

SGREIT last changed hands at S$0.815 on Tuesday. It currently trades at about 0.9 times its book value and sports a historical distribution yield (taking into account the latest DPU and that of the last three quarters) of 6%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.