• 2QFY18 DPU dipped 7.1% YoY
• Recovery in SG office committed occupancies
• Expect sequential improvement in 2HFY18

2QFY18 Results Within Our Expectations

Starhill Global REIT (SGREIT) reported another challenging set of results although this was inline with our expectations. 2QFY18 gross revenue fell 3.0% YoY to S$52.5m while NPI dipped 2.2% to S$40.5m. The latter was attributed largely to a 20.0% fall in NPI for its Singapore office assets, while there was also weakness in Australia (-12.4%). DPU came in lower by 7.1% YoY to 1.17 S cents as there were also higher withholding taxes for SGREIT’s Malaysia and Australia properties.

On a 1HFY18 basis, SGREIT’s gross revenue slipped 3.6% to S$105.4m. NPI was down 2.9% to S$81.9m and this formed 48.1% of our FY18 forecast. DPU of 2.37 S cents represented a decline of 7.4% and constituted 48.7% of our full-year forecast.

Operational Improvement Likely Ahead

Challenges were apparent during the quarter, as Wisma Atria (retail) saw a 6.3% and 6.2% YoY drop in tenant sales and shopper traffic due to the renovation of the food court, which has since commenced operations in Nov 2017. Its Singapore office portfolio also recorded negative rental reversions. However, we expect 2HFY18 to be better for SGREIT as compared to 1HFY18 for the following reasons:

1. committed occupancy at its Singapore office portfolio ramped up 5.9 ppt QoQ to 89.4% (as at 31 Dec 2017) but the committed leases will only commence in 3QFY18;
2. contribution from its property in China after expected completion of renovation works in 1QCY18 by its tenant Markor.

Another positive development was the announcement that global apparel retailer UNIQLO would be opening its first Perth flagship store in mid-2018 at SGREIT’s Plaza Arcade property.

Trading at 6.2% FY18F Distribution Yield as of 29 Jan Closing Price

In terms of balance sheet, SGREIT’s gearing stood at 35.3%, as at 31 Dec 2017, which is stable compared to end-1QFY18 (35.4%). This leaves management with a debt headroom of ~S$259m before reaching a gearing level of 40%. We are keeping our forecasts and S$0.77 fair value estimate unchanged given this in-line set of results. Based on our projections and SGREIT’s closing price on 29 Jan, it offers investors a distribution yield of 6.2% for FY18F.

Source: OCBC Research - 30 Jan 2018