Right now, Starhill Global REIT (SGX: P40U) has a unit price of S$0.71.
At that price, the REIT has a distribution yield of 6.3%. That looks attractive amid the low interest rate environment we are currently in.
Would the high distribution yield make Starhill Global REIT a buy? It’s not that straightforward though since distribution yield is not the only thing REIT investors should look at.
Here, let’s explore using my 10-step guide to pick the best Singapore REITs to determine holistically whether Starhill Global REIT makes a great investment.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Before diving into an analysis of Starhill Global REIT, let’s explore what its business is about.
Starhill Global REIT, which was listed in 2005, invests in office and retail assets in Singapore and overseas markets.
In our city-state, Starhill Global REIT has interests in Wisma Atria and Ngee Ann City. Singapore takes up the bulk of the REIT’s portfolio valuation at around 69%.
On top of Singapore, the REIT has properties in Australia, Malaysia, China, and Japan. The following gives an overview of Starhill Global REIT’s portfolio:
Starhill Global REIT is sponsored by YTL Corporation Bhd (KLSE: 4677), a Malaysian infrastructure conglomerate.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Starhill Global REIT has a financial year that ends in June each year.
The REIT’s gross revenue and NPI performances have not been great over the last four years. This could suggest that Starhill Global REIT is struggling to grow its overall business.
| FY 2015/16 | FY 2016/17 | FY 2017/18 | FY 2018/19 | |
|---|---|---|---|---|
| Gross revenue (S$' million) | 219.7 | 216.4 | 208.8 | 206.2 |
| Net property income (S$' million) | 170.3 | 166.9 | 162.2 | 159.4 |
Verdict: Fail
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
With the falling gross revenue and NPI, DPU has been coming down as well.
| FY 2015/16 | FY 2016/17 | FY 2017/18 | FY 2018/19 | |
|---|---|---|---|---|
| Distribution per unit (Singapore cents) | 5.18 | 4.92 | 4.55 | 4.48 |
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
Next, let’s look at Starhill Global REIT’s property yield.
For FY 2018/19, the REIT had an NPI of S$159.4 million while its investment property value stood at S$3.06 billion.
Those figures translate to a property yield of 5.2%, which is within the range of 5% to 9%.
Verdict: Pass
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, Starhill Global REIT had a gearing ratio of 36.3%, which is below my limit of 40%.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Moving on, let’s find out if Starhill Global REIT has an acceptable interest coverage ratio.
At the end of last year, Starhill Global REIT’s interest was not well-covered, as seen from its low figure of 3.6x.
Verdict: Fail
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Starhill Global REIT’s latest occupancy rate is strong at 96.5%.
Having said that, the rate could be higher if not for the drag from the Singapore office portfolio, whose occupancy stood at 89.2%. The decline over the previous period (September 2019’s 93.6%) was mainly due to the pre-termination of a tenant at its Ngee Ann City property.
I would watch if Starhill Global REIT is able to fill in the vacancy in the coming quarters.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
According to Starhill Global REIT’s investor relations department, the REIT doesn’t disclose its portfolio rental reversion rate.
What we know from public disclosures, though, is that master leases and anchor leases, which have periodic rent reviews, make up around 49% of the REIT’s gross rent.
Starhill Global REIT’s largest master tenant and revenue contributor is Toshin, which occupies all retail areas except level five of Singapore’s Ngee Ann City. As of 31 December 2019, Toshin contributed to 21.9% of Starhill Global REIT’s gross rent. So, it makes sense to pay attention to Toshin’s rental contribution.
Toshin’s rental rate is reviewed every three years until the lease expires in 2025.
In the latest rent review for Toshin in 2019, the new base rent signed was equal to the existing rent, so rental reversion in that particular review period was flat.
The next rent review takes place in June 2022.
Verdict: Unknown
8. Growth Prospects Check
In its latest earnings presentation, Starhill Global REIT provided a chart with regards to its growth prospects:
Overall, however, I’m not too sanguine about Starhill Global REIT’s growth.
Specifically, there isn’t any income growth from Toshin at least until June 2022, where the next Toshin rent review will take place.
There’s also the risk of Toshin’s lease not being renewed after it expires in 2025. If that happens, there’ll be a huge vacuum to be filled since Toshin contributes a large part of Starhill Global REIT’s gross rent.
Verdict: Fail
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Starhill Global REIT’s unit price of S$0.71, it is valued at a PB ratio of 0.81x.
Over the past five years, its average PB ratio stood at around 0.83x.
Therefore, Starhill Global REIT seems to be fairly valued.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Starhill Global REIT’s unit price of S$0.71, it has a distribution yield of 6.3%, which makes the mark.
Verdict: Pass
The Final Verdict
Starhill Global REIT has a final score of 5/9 (without considering rental reversion since there’s no information on it).
Right at the start, I mentioned that Starhill Global REIT’s distribution yield is high and looks attractive.
However, through this analysis, we’ve realised that the yield is high for a reason. As seen, the REIT’s gross revenue, NPI, and DPU have been falling over the years. The lack of growth may also have caused potential investors to stay on the sidelines.
In conclusion, I’ll skip investing in Starhill Global REIT.
What Are Your Thoughts on Starhill Global REIT?
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