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3 Reasons Starhill Global REIT May Cut Its Dividend

Starhill Global REIT (SGX: P40U) invests in properties used for both office and retail purposes. Its portfolio consists of 10 properties in Singapore, Australia, Malaysia, China, and Japan, valued at S$3.1 billion. Starhill is managed by an external manager, YTL Starhill Global REIT Management Limited, which is a wholly-owned subsidiary of Malaysian-listed YTL Corporation Berhad (KLSE: 4677).

While most REITs in Singapore have been able to grow their distributions per unit (DPU) over time, Starhill has had somewhat of a patchy record. Here are three reasons I believe the REIT may reduce its dividend in the quarters ahead.

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No. 1: Revenue and net property income decline

Looking at Starhill’s most recent quarterly earnings report, its year-to-date (YTD) 9-month (9M) 2018-19 revenue for Wisma Atria was down 8.4% year on year, while net property income (NPI) was down 10.5% year on year. In addition, the REIT’s Australian, China, and Japan properties also reported lower revenue and NPI year on year, with only Malaysia showing improved results.

The weaker performance for Wisma was due to the soft retail scene, and investors should also note that Wisma alone accounts for around 25% of the REIT’s total revenue, as well as 25% of NPI. Therefore, the downbeat performance of this asset alone could have a negative impact on DPU.

No. 2: Q1 and Q2 DPU weakness

Source: Starhill Global REIT’s Q3 2019 Presentation Slides

From the table above, it should be noted that Starhill’s DPUs for Q1 and Q2 were already down year on year, and the only reasons Q3 2019’s DPU was up were lower tax expenses and distributable income retained. The trend, therefore, has already started for a lower year-on-year DPU, and I expect this to continue unless performance for the underlying properties improves.

No. 3: Falling occupancy rates

Source: Starhill Global REIT’s Q3 2019 Presentation Slides

Occupancy rates have also fallen for both Singapore retail and office properties. As of 30 June 2017, the occupancy rate was 99.2% for SG retail, but for Q3 2019, it was 97.2%. To be fair, if committed leases were added in, then occupancy will be a high 99.7%. However, for Singapore office property, the occupancy rate was down to 94.4% even with committed leases, from a high of 99.3% on 30 June 2015.

Australia is also showing weakness. In 2013, occupancy was close to 100%, but this has since declined to only 92.4%. In addition, Starhill reports that Malaysian retail supply expected to increase by approximately 31% over a 5-year period to about 27 million square feet by 2023, which will exert pressure on rental rates and occupancy levels. All of these factors should have the effect of pushing down DPU in the future.

A reduction in DPU looms large

An additional point to note is that Starhill’s cost of borrowing was 3.29%, which is higher than its peers. CapitaLand Mall Trust (SGX: C38U) has a cost of borrowing of 3.2%, while Frasers Centrepoint Trust (SGX: J69U) has a 2.7% cost of borrowing. It seems that investors may need to hold out a bit longer until the challenges are dealt with effectively before they can see DPU growth again.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust and Capitaland Mall Trust.