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Where To Next For Starhill Global?

Starhill Global Real Estate Invmt Trust (SGX:P40U) has been an out-performer over the last five plus years. The real estate investment trust (REIT) recorded total returns (inclusive of dividends and right issue) of about 209% from 1 Jan 2009 to the closing price last Friday (31 October 2014). By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 76% for the same duration.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as distributions to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

While the returns from Starhill Global has been dashing — as Foolish investors, we should look behind the curtains to understand how sustainable the distributions are, and how it can grow.

A closer look

Starhill Global has 12 properties under its umbrella located in Singapore, Malaysia, Australia, China, and Japan. The properties are primarily prime retail locations. It also has office rental that makes up a smaller percentage of the overall rental pie for REIT.

To get a sense of the resilience of the property portfolio, we can look at the gross revenue by geography of the REIT. Ngee Ann City and Wisma Atria makes up the Singapore property portfolio, while its Malaysian property portfolio covers Starhill Gallery and Lot 10 Property. The David Jones Building and Plaza Arcade comes under its Australian property portfolio and the Renhe Spring Zongbei Property in Chengdu, China is the sole property in its China portfolio. Finally, it has five different properties under its Japan property portfolio.

starhill graph 1

Source: REIT earnings presentation

In 2013, Wisma Atria and Ngee Ann City made up 66% of the gross revenue for the REIT. In the past five years, the main contributors for revenue growth (compared to 2009) came from its acquisitions in Malaysia and Australia on June 2010 and August 2009 respectively. On the other hand, its Chengdu and Japan properties showed relatively lacklustre gross revenue growth compared to the properties in the other three countries.

It is worthy to point out that there is a high tenant concentration of its gross rentals where 38.5% of its total gross rental comes from two tenants: Toshin Development Singapore Pte. Ltd. and YTL Group. In fact, part of the reason for the gross revenue increase in 2013 for Ngee Ann City was due to the base rental uplift from its master tenant Toshin. Toshin made up 86.9% of Ngee Ann City’s gross revenue for retail in 2013.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the Net Property Income (NPI). The NPI is defined as the gross rental revenue of a property minus all related expenses.starhill graph 2

Source: REIT earnings presentation

Wisma Atria and Ngee Ann City again emerged as significant contributors to overall NPI for the REIT. Together, they made up 65% of the NPI for 2013. In the past five plus years, Malaysia and Australia were naturally the main drivers of growth NPI, while Chengdu and Japan were both rather weak. The NPI yield for Wisma Atria appears to be weaker compared to Ngee Ann City and its properties in Malaysia and Australia. Although Wisma Atria made up 33% of overall gross rental, it only contributed 31% of the overall NPI for the REIT in 2013.

Moving on, Foolish investors might also want to study the REIT’s debt profile. The debt profile provides clues on how the REIT is funded, and its sensitivity to the interest rate environment. To do that, we can look at the latest quarterly earnings presentation for the quarter ended 30 September 2014.

Gearing Ratio 29.1%
Interest Cover* 5.1
Weighted Average Debt Maturity 3.6 years
Fixed/hedged debt ratio 100%
All-in Interest Rate 3.15%
Unencumbered assets ratio 80%
Total Borrowings $859 million

Source: REIT earnings presentation

With a gearing of 29.1%, and 100% of its loans fixed or hedged, Starhill Global might be relatively protected from any increases in interest rates in the near future. Furthermore, the next refinancing requirement will be in July 2015. Nevertheless, Foolish investors should keep an eye out for its refinancing activities in 2015 and 2016 when 36.3% of its borrowings comes due.

Starhill Global does have a blemish in its refinancing track record. In 22 June 2009, it proposed a 1-for-1 rights issue at an issue price that was some 45% lower than its closing price back then.

A quick look ahead

Looking ahead, Starhill Global is planning for an asset enhancement initiative for its Plaza Arcade property in Australia. The Phase 1 of activities is expected to begin in 2015, and the AEI is estimated to cost A$10 million. The relatively weaker performance of Wisma Atria could be the reason why the REIT management is looking to reposition tenants within the property to drive more rentable space, and to improve the tenant mix.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether the rising distributions by the REIT is supported by the quality of business growth that we are looking for.

Starhill Global owns two of the most iconic buildings along the Orchard Road stretch in Singapore. Its presence on the popular shopping street can also make it more sensitive towards tourist spend compared to sub-urban malls. On the acquisition front, it has struggled in Japan and China thus far, therefore its future acquisitions should be watched carefully.

When faced with uncertainty on the future progress of a REIT, Foolish investors might consider demanding a higher margin of safety for an investment to provide adequate return over the long term.

Starhill Global REIT’s share price last traded at S$0.82 as of last Friday (31 October 2014). That translates to a historical price-to-book ratio of 0.87 and a distribution yield of around 6.1%. To keep up to date with the latest company analyses and market news, click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore can also show how you can GROW your wealth in the years ahead.

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