In 2005, Prime REIT was listed on the Singapore stock exchange. Its initial portfolio featured two landmark properties – Wisma Atria and Ngee Ann City.
Prime REIT went through a few name changes, first rebranded to Macquarie MEAG Prime REIT (MMP REIT).
Then Macquarie Prime REIT (MP REIT) in 2008.
The critical move was when YTL Corporation took a big stake in the retail REIT and rebranded to Starhill Global REIT in October 2008.
At a market cap of S$1.15 billion, Starhill Global REIT pays a pretty high 7% dividend yield, higher than other defensive, Singapore retail REITs.
Can this dividend yield hold up?
And is this worth buying?
Let’s dive in.
Starhill Global’s portfolio backed by two crown jewels
Starhill Global owns nine properties all across Asia. Its focus is retail, with the largest geographic concentration in Singapore.
Its two crown jewels are:
- Wisma Atria (valued at S$817 million)
- Ngee Ann City (valued at S$1,148 million)
Both make up Starhill Global’s entire Singapore portfolio – contributing a massive 63% of its total gross revenues.
In Malaysia, Starhill Global owns Lot 10 and The Starhill, located in Bukit Bintang. This is easily considered the heart of Kuala Lumpur.
Click here to read: Is Maybank’s 6% Dividend Yield Sustainable?
Starhill Global’s strong occupancy, resilient tenants
Starhill Global’s high-quality properties really shows. Over the last five years, it has had an occupancy rate of over 95% – even during the economic downturn.
What’s more, this retail REIT giant has a staggered and weighted average lease expiry (WALE) of over seven years.
This doesn’t just lead to higher vacancy rates, but vacancies give tenants more bargaining power – negotiating for lower rents and reducing rental reversions.
If we look at the graph above, we see less than 15% of Starhill’s annual rental income is expiring each year at least until the end of 2028.
Even if you are pessimistic about a poor economic situation over the next two years, I don’t expect Starhill Global to be affected as it has locked in its rental-paying tenants.
So far, Starhill Global’s latest financial results have been healthy.
Both gross revenues and net property income are stable year over year.
Starhill Global’s balance sheet is healthy
On balance sheet, Starhill Global looks healthy:
- Total debt stands at S$1 billion
- Gearing ratio is 37%, which is way under MAS’s regulatory limit of 50%
- Interest coverage is 2.9x
- Average interest cost is ~3.65%
Even in downside scenarios, Starhill Global is pretty protected.
If interest rates suddenly rise to 4.65%, Starhill Global is capable of covering its interest expenses by 2.3x. That’s a good buffer.
Over the next two years, Starhill Global has ~S$170 million in debt expiring. On average, Starhill Global’s debt matures every 2.9 years.
From the look of this, Starhill Global doesn’t have much to worry until 2027 and beyond – this gives management ample time to plan ahead.
The biggest risk: E-commerce disruption
The biggest risk is clear: Rapid changes of e-commerce. This is not a new problem. But it’s been growing over the last two decades.
Nowadays, customers don’t need to visit physical stores to get food, groceries, discretionary/luxury items, or anything. In fact, this has been changing.
Today, we have Lazada, Shopee, Foodpanda that has reshaped the way we buy things – online. Consumers can buy stuff that’s conveniently shipped to their doorsteps.
And it’s way cheaper.
The problem for retail malls is stores may potentially face lower foot traffic and shrinking profits. Retailers who shift online may have less demand for brick and mortar stores.
Starhill Global is much more exposed to the risk of e-commerce vis-a-vis other REITs because Starhill has 85% of its portfolio concentrated in retail property.
Having said that, Starhill Global’s properties are still high-quality real estate in prime locations.
It has demonstrated resilience to the online onslaught and have been able to maintain high occupancy rates over the past five years.
However, retail malls must evolve.
According to Deloitte, retail malls have to shift focus to experiential retail – creating things like flagship, pop-up, showroom or other innovation formats. You can’t just sell products anymore.
Starhill Global shares trading at a bargain
I’ll be honest. Starhill Global’s DPU hasn’t been great – falling year over year. That’s a concern.
Credit: Starhill Global REIT’s financial statements
But here’s the thing. The more I look at its valuations, the more I’ve come to believe Starhill Global shouldn’t be this undervalued.
From a P/NAV ratio, Starhill trades at a significant discount – and has been doing so for the longest of time.
In fact, a high-quality retail REIT should trade closer to its 1.0x P/NAV ratio, trading at just its net asset value.
One potential reason valuations are so low is because the market is currently interested in other sectors, or maybe it’s in a “risk-off” mode.
Even if the re-rating of its valuations doesn’t happen soon, investors still enjoy a 7% dividend yield, backed by long-term leases and its two Singapore crown jewels.
My final thoughts — is it worth a buy?
There’s many reasons to buy Starhill Global REIT today – Valuations are cheap, high dividend yield, and backed by a strong occupancy rate.
At the same time, there are risks. For one, E-commerce will be the largest thorn in retail malls.
Starhill Global has proved its resilience. If you agree this retail REIT giant has held up during the COVID-19 pandemic, maintained a high occupancy rate and is backed by one of Malaysia’s largest conglomerates, YTL, perhaps this retail REIT giant is worth a second look.
Why is CICT mentioned? As a comparison or copy paste?
But a silver lining is CLCT’s business parks have been doing much better than competitors within the same region.
Hi SJJ,
We’ve removed and updated the comment. It was a typo error. Thank you for pointing out!
Cheers,
Willie