• Keep BUY, new SGD0.57 TP (from SGD0.58), 17% upside, c.8% FY25F (Jun) yield. Starhill Global REIT has navigated the high interest rate environment well, with steady operational improvements and active debt management. The extension of two key master leases for long periods has removed a key overhang, and we expect a favourable outcome from the Myers arbitration. Operational strength should continue with positive rent growth for both retail and office, along with stable occupancy. 2HFY24/FY24 results were slightly below estimates due to higher tax expenses.

• Mid-high single-digit rent reversion for Singapore retail and office assets are expected to continue in FY25. Tenant sales and shopper traffic at Wisma Atria (WA) rose c.7% and 13% (better than peers), indicating an uplift from asset enhancements and the new MRT opening. New retail tenants include a mix of new-to-market fashion brands, jewellery, and F&B players, while office demand came from luxury retailers and medical tenants. Portfolio committed occupancy saw a slight QoQ dip (-0.3ppts) but remains high at 97.7%.

• Modest gearing of 36.8% provides room for selective accretive acquisition opportunities for the REIT. Management has indicated its preference for office assets in markets such as Japan and Australia (Brisbane) at the right price and opportunity. It also remains open to divest office strata lots at WA at a good price, in order to recycle capital. Currently, the office portfolio accounts for c.15% of SGREIT’s overall revenue, and we believe this could increase to 30-50% in the medium term. Financing costs are likely to peak at c.4% (currently 3.8%) with 79% of its debt currently hedged.

• Asset enhancements for WA were completed in 1H24 with the modernisation of interior works and widening of the entrance portal to the MRT system, which has resulted in increased traffic flow to the mall. SGREIT is also exploring the conversion of some of the car park areas into retail spaces to unlock value.

• Portfolio valuation remains stable (-0.2% YoY) with a slight uplift to Ngee Ann City’s valuation post the signing of the new Toshin master leases, offset by a decrease in Australian assets from the cap rate expansion as well as FX weakness. With rate cuts around the corner, we believe valuations have bottomed out.

• We tweak FY25-26F DPU lower by 2-3%, mainly by adjusting for higher tax rates and slightly higher operating costs. About 63% of the portfolio by NLA is green-certified, up from 40% last year and on track for the 70% target by 2030. SGREIT’s ESG score of 3.2 (out of 4.0) is a notch above the country median score, resulting in a 2% ESG premium being included in our TP.

Source: RHB Research - 27 Aug 2024