P40U - Starhill Global REIT

Background

Starhill REIT mainly focuses on retail sector, although it has some exposure to office sector (about 84% of total gross revenue from retail sector while remaining 16% from office sector). Its sponsor is YTL Corporation, one of the biggest conglomerate in Malaysia with USD 6.8 billion market capitalization. It owns real estates in Singapore, Australia, Malaysia, China and Japan. About 62% of its total gross revenue is derived from Singapore investment properties (Wisma Atria & Ngee Ann City).


The Pros

1) Asset-Enhancement initiatives (AEIs)

Starhill REIT management has been actively seeking ways to growth its DPU for its shareholders by focusing on Asset-Enhancement initiatives (AEIs). For instance, asset redevelopment works at Lot 10 in Kuala Lumpur has recently been completed and accessibility to the mall from Bukit Bintang MRT station exit has been improved. This will ensure higher human traffic flow to the mall and subsequently generate higher sales income to the existing tenants. In addition, Plaza Arcade’s anchor tenant UNIQLO has commenced renovation works, target to be completed by 2H 2018.

2) Prudent Capital Recycling

Starhill REIT recently divested Nakameguro Place property in Tokyo, Japan and this represents the fifth divestment in Japan since 2013 as part of Starhill REIT's ongoing strategy to refine its portfolio. The sales proceed alone generated about S$ 6.41 million or 25.0% premium to its latest valuation and it is higher than the gross revenue contributed by Japan of about S$ 3.1 million in FY 2017 (1.4% of total gross revenue).

I think the REITs is slowly divesting all of its investment from Japan properties because unlike in other countries, Japanese real estates tend to depreciate over time possibly due to natural disasters and depopulation. As of now, 4 more Japan properties left to be unloaded.

3) Unencumbered Assets

Unencumbered asset means it is free of debt or other financial liability.

In Annual Report FY 2017, approximately S$2.3 billion (73%) of the Group’s investment properties are unencumbered. These assets currently are not in collateral for banks and the REIT can use them to persuade bank to borrow money during economy crisis.


The Cons

1) Taxes

The rental income from Malaysia segment (about 13% of total gross revenue) has been impacted by weak market sentiment due to the recent introduction of GST and new withholding taxes in Malaysia. Because of this, Mr Market becomes unforgiving and punishes the REIT's unit price. But thanks to the recent general election results, I believe that Malaysian market will eventually recover from the current pessimistic state, leading to the appreciation of of the Malaysian ringgit against the Singapore dollar. In time we shall see.

2) Forex Risk

Starhill REIT is subjected to Forex risk because it has foreign investment properties in Malaysia, Australia, Japan & China. Nevertheless, the REIT partially offset the volatility of the forex risk by adopting foreign currency denominated borrowing as a natural hedge, and short-term foreign currency forward contracts to fix the exchange rate within a stipulated timeframe at a price agreed upon today.

3) Interest Rate Risk

REITs have to borrow money from banks because they have pretty much nothing left after distributing at least 90% of their net income to shareholders to enjoy tax transparency. If the interest rate rises abruptly, REITs might not have sufficient liquidity to clear debts. Nevertheless, Starhill REIT hedges substantially its interest rate exposure within the short to medium term by using fixed rate debt and interest rate derivatives including interest rate swaps and caps.


Why I vested

To remind myself, below are the reasons why I vested into Starhill Reit on 29 Mar 2018:

1) Gearing Ratio (factored in perpetual securities issued) < 40%

REITs will have to borrow money from banks for organic or inorganic DPU growth. To ensure that they are not over-leveraged, gearing ratio < 40% rule is followed (MAS set gearing ratio < 45%).

2) The latest gearing ratio (FY 2017) is 35.2% < 40%.

Undervalued in terms of P/B ratio & Dividend yield

This is to ensure margin of safety before buying any stocks to prevent huge capital loss. I will buy shares at a relatively low price and sell when they are over-priced.

The historical dividend yield was roughly in the range of 5.08% to 7.40%. At unit price of S$0.72 with DPU of S$0.0492 (latest financial year 2017), the dividend yield was 6.83% which is closer to 7.40%.

The historical P/B ratio was roughly in the range of 0.76 to 1.06. At unit price of S$0.72 with NAV per unit of S$0.9212 (latest financial year 2017), the P/B ratio was 0.78 which is closer to 0.76.

I vested at the unit price of S$ 0.72.

3) Dividend yield > 6%

For someone who is aiming for early retirement, I will place heavy weightage to income stocks in my portfolio.


***Latest Update***
I sold the entire position because their DPU is steadily declining. Their main bulk of income, which is derived from the two properties in Orchard, is slowly deteriorating. I believe this is due to a fundamental change in both consumer taste on discretionary goods and the perception of Orchard as the shopping highlight of Singapore. This hypothesis, perhaps is further solidified when Starhill REIT announced their plan to look elsewhere to expand its footprint.