Starhill Global REIT Downgraded To BBB

Three years ago, I wrote about Soilbuild Business Space REIT being given a Baa3 credit rating by Moody’s. (Read more: What is meant by Baa3?) Today, I receive an email notification that Starhill Global REIT has been downgraded from a credit rating of ‘BBB+’ to ‘BBB’ by Standard & Poors (S&P). This is an indication that something isn’t right even though it is not a recommendation to buy or sell.

My wife currently held 9% of Starhill Global REIT in her stock portfolio. In FY2019, Distribution Per Unit (DPU) declined 1.5% from 4.55 cents in FY18 to 4.48 cents in FY19.

Here are a few noteworthy points from the S&P report:

  • Starhill Global REIT is facing pressure in rent reversions in its key Singapore assets amid weakened economic conditions.
  • Funds from operations (FFO) to debt to decline to 7.6%-7.8% in fiscals 2020 and 2021.
  • Ngee Ann City’s master tenant’s rent review in June 2019 resulted in rents remaining flat (Read more: Starhill Global REIT Decides Not To Increase Toshin New Base Rent)
  • Contributions from Starhill Global REIT’s Australia assets were weighed down by the depreciation of the Australian dollar against the Singapore dollar.
  • Starhill Global REIT is performing AEI on Starhill Gallery Mall in Malaysia. The rental rebates agreed by Starhill Global REIT will weigh down rental performance at these assets.

The outlook doesn’t seem good which might place further pressure on the Distribution Per Unit (DPU).

Starhill Global REIT Decides Not To Increase Toshin New Base Rent

Starhill Global REIT Logo

This is one piece of news that disappoints investors of Starhill Global REIT. As highlighted in my previous post (Starhill Global REIT High Dividend Yield Can Buy?), Ngee Ann City Property Retail (Singapore) expires 2025 with a 5.5% increase in base rent from 8 June 2016. The rent review is this month June 2019. Toshin is the master tenant occupying all the retail areas except level five of the Ngee Ann City Property (as hereinafter defined) for the period of 12 years from 8 June 2013.

The manager of Starhill Global REIT has announced that the new base rent will remain the same as the current rent. This will remain 3 years from 8 June 2019. As at 31 March 2019, the Toshin Master Lease contributed to approximately 21.9% of Starhill Global REIT’s portfolio gross rent. Perhaps due to the weak retail sentiments, my opinion is that Starhill Global REIT is afraid Toshin might pull out of its Ngee Ann City Property if Starhill Global REIT increases the new base rent.

Below are Starhill Global REIT’s 3rd Quarter FY18/19 Financial Results.

Third Quarter FY 2018/19 Financial Results

3QFY18/19 3QFY17/18 Change
Gross Revenue $51.3 mil $51.7 mil (0.9%)
Net Property Income $39.6 mil $40.3 mil (1.8%)
Distributable Income $25.0 mil $25.4 mil (1.4%)
Income to be Distributed to Unitholders $24.0 mil $23.8 mil 0.9%
Distribution Per Unit (“DPU”) (cents) 1.10 1.09 0.9%
  • Higher contributions y-o-y from Myer Centre Adelaide, Plaza Arcade and Ngee Ann City Property (Office) were offset by lower contributions from the retail portfolio in Singapore and the depreciation of the Australian dollar against the Singapore dollar.
  • DPU for 3Q FY18/19 was higher by 0.9% y-o-y mainly due to lower tax expenses and distributable income retained, partially offset by lower NPI and higher interest costs.
  • Annualised 3Q FY18/19 yield is 6.11%, based on closing unit price of S$0.73 as at 31 March 2019.

Debt

Gearing stood at 35.7% and about 91% of its borrowings are fixed/hedged as at 31 March 2019.

Conclusion

My opinion is that Starhill Global REIT is afraid Toshin might pull out of its Ngee Ann City Property if Starhill Global REIT increases the new base rent. The Toshin Master Lease contributed to approximately 21.9% of Starhill Global REIT’s portfolio gross rent and it will be disastrous if Toshin pulls out.

Starhill Global REIT 4Q2017/18 Financial Results Continue to Disappoint

Starhill Global REIT Logo

Starhill Global REIT released its 4QFY17/18 financial results on 27th July 2018. The financial results are still depressed due to weaker contributions from the office portfolio and retail scene. In fact, this is similar to its 3QFY17/18 financial results which I wrote in the last quarter (Read more: Starhill Global REIT 3Q2017/18 Results Is Disappointing ). There are no signs of improvement.

$1.6 million of income available for distribution for 4QFY17/18 has been retained for working capital requirements. This is similar to 3Q2017/18 and it gives me the creeps whether Starhill Global REIT is running into some financial troubles. Total debt amounts to $1,134 million and the current gearing is 35.5%. 73% of assets are unencumbered.

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