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The Good and The Bad From Starhill Global REIT’s Fiscal Year Results

Credit: Calvin Teo

Starhill Global Real Estate Investment Trust (SGX: P40U), which owns a portfolio of 10 properties in six countries, recently released its earnings update for its financial year ended 30 June 2018. It has been a mixed year for the REIT. Here’s a quick summary on some of the positives and negatives from its full year financial report.

The bad

The most glaring thing about Starhill Global REIT’s earnings update was that its headline numbers were down year-on-year. Gross revenue, net property income and distribution per unit (DPU) decreased 3.5%, 2.8% and 7.5% respectively. The lower DPU is a chink the armour as the REIT had previously produced consistent DPU growth. The chart below shows its historical DPU since its listing in 2005.

Source: Starhill Global REIT’s FY17/18 Q4 Earnings Presentation

The REIT’s office portfolio has struggled in recent quarters, and was one of the reasons for the lower distribution.

Despite its relatively safe gearing ratio of 35.5% (below the 45% regulatory cap imposed on REITs), Starhill Global REIT still has a low interest cover (net property income versus interest expense) of 4.0 times. The low interest cover may suggest that the trust will have limited flexibility to increase its debt load to fund acquisitions in the future.

Lower revenues may have led to a decline in its portfolio’s value by 0.6% from a year ago. Revaluation does not affect cash flow, but I prefer REITs that are able to consistently report revaluation gains. An increase in its asset value would gives the REIT the financial capacity to increase its debt load for future yield-accretive acquisitions.

A glimmer of hope

Management has noted that the Singapore office portfolio occupancy has shown signs of recovery, in line with the sector’s rebounding fundamentals. Starhill Global REIT’s Singapore office portfolio occupancy has increased to 95% as of 30 June 2018, up from 90.7% three months earlier.

The REIT also has a stable portfolio lease profile with average lease terms of 4.4 years by gross rental income.

Another positive note is the completion of redevelopment of Plaza Arcade in Perth. The asset enhancement initiative has resulted in an additional 8000 square feet of retail space. The REIT has secured an anchor tenant in UNIQLO which has received a great reception by shoppers.

The Foolish bottom line

The headline numbers for Starhill Global REITs latest fiscal year were indeed disappointing.

But there could be a ray of hope with its office portfolio rebounding, coupled with the reopening of the Plaza Arcade in Perth. However, Singapore’s retail market remains challenging, and with more than 50% of Starhill Global REIT’s revenue coming from this segment, the retail headwinds could also hinder results in the future.

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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 Jeremy Chia doesn't owns shares in any companies mentioned.