• 2QFY19 DPU fell 3.4% YoY
• Higher occupancy at MCA office
• Enhancing Orchard Road

2QFY19 Results Slightly Below Our Expectations

Starhill Global REIT’s (SGREIT) recent 2QFY19 results came in slightly short of our expectations. Gross revenue and NPI fell 2.7% and 2.4% YoY to S$51.0m and S$39.5m, respectively. The drag came largely from weaker performance at Wisma Atria (retail) and depreciation of the AUD against the SGD, but partially offset by a strong rebound in Ngee Ann City (office).

DPU declined by 3.4% YoY and 1.7% QoQ to 1.13 S cents. The YoY dip was attributed largely to the lower NPI, higher finance costs (+5.2%) and slightly lower payout ratio of 98.0% (2QFY18: 99.4%). Although the YoY decline in DPU was not a surprise to us, we had expected an uptick in DPU on a QoQ basis.

For 1HFY19, SGREIT’s gross revenue and NPI both fell 2.3% to S$103.1m and S$79.9m, respectively, and both figures formed 47.1% of our FY19 forecast. DPU of 2.28 S cents represented a dip of 3.8%, and this met 48.2% of our full-year forecast.

Rental Pressures Remain in Singapore; MCA Gets An Occupancy Lift

Operationally, Wisma Atria (retail)’s actual occupancy increased 2.1 ppt QoQ to 93.5%, while committed occupancy was 97.6%. However, this came at the expense of rents. On a positive note, tenants’ sales grew 2.9% YoY in 2QFY19, and this was the first YoY increase since 1QFY18.

Another positive development came from Myer Centre Adelaide (MCA), which finally secured a new anchor tenant for its office component, thus lifting MCA’s overall committed occupancy to 91.7% (office component’s committed occupancy more than doubled to 74.8%).

Government Initiatives to Revamp Orchard Road

On 30 Jan, STB, URA and NParks jointly announced plans to enhance Orchard Road as a lifestyle destination. Innovative retail concepts, attractions, entertainment and events will be introduced, while elevated link bridges will help to improve accessibility.

We trim our FY19 and FY20 DPU forecasts by 2.6% and 2.2%, respectively, on account of a weaker AUD to SGD assumption and lower rental rates for Wisma Atria (retail), but partially offset by higher occupancy for MCA. However, as we also lower our cost of equity assumption by 22 bps to 8.0% given a more risk-on market sentiment and concrete plans to improve the longer-term viability of Orchard Road which we believe would be beneficial to asset values in the precinct, our fair value inches up from S$0.74 to S$0.75.

Source: OCBC Research - 1 Feb 2019