3 Risks Of Starhill Global Real Estate Investment Trust
Starhill Global Real Estate Investment Trust (SGX: P40U) has a portfolio of 10 properties located in Singapore, Australia, Malaysia, China and Japan. Singaporeans would be most familiar with its two landmark properties in Orchard Road, Wisma Atria and Ngee Ann City. The real estate investment trust (REIT) currently spots an attractive distribution yield of 6.5%, but can it sustain it? In this article, I take a look at some risks that investors should know of when investing in Starhill Global REIT.
Despite owning a portfolio of 10 properties, the REIT is still very much reliant on just its two landmark properties in Singapore. In the fourth quarter of its financial year 17/18, which ended on 30 June 2018, around 62.2% of the REIT’s total gross revenue was from Wisma Atia and Ngee Ann City. In terms of asset value, these two properties also make up more than two-thirds of the total portfolio.
With a high dependence on these two properties, Starhill Global REIT is susceptible to concentration risk. Any underperformance in any of these two properties can lead to a significant impact on its bottom line, and ultimately distributions to unitholders.
In addition, the top 10 tenants of the REIT currently make up 57.9% of its portfolio gross rents. As such, these tenants most probably have negotiation power over the REIT. The REIT is also reliant on these major tenants ability to pay up their rent.
Retail segment in its core properties remain challenging
In the most recent quarter, tenant sales and shopper traffic in Wisma Atria declined by 3.9% and 12.7% year-on-year. There could be many reasons for this decline, including changing consumer behaviour, competition from other shopping malls in the area or the REIT’s inability to attract key tenants into Wisma to keep the retail space attractive to shoppers.
Also, its Ngee Ann City retail segment is master leased out to Toshin, which is due for rental review in June 2019. If retail markets in Singapore do not pick up, it will be difficult for Starhill Global REIT to negotiate favourable terms on the new master lease.
Low interest cover
As of 30 June 2018, Starhill Global REIT had a gearing ratio of 35.5%. (the gearing ratio is a measure of debt level against its total assets; in the case of REITs, a lower gearing is desirable).
Despite its gearing being lower than the 45% regulatory cap imposed on REITs in Singapore, it has an interest cover of just 4.0 times. The interest cover is a measure of interest expense against a REIT’s property income. Ideally, I prefer REITs that have low interest cost and interest cover of above five times. At an interest cover of 4.0 times, any increase in interest expense or decrease in rental income could impact the REIT’s profitability.
The low interest cover will also limit the REIT’s ability to take on more debt in the future, and therefore, limiting the financial flexibility for more acquisitions.
The Foolish bottom line
At the moment, Starhill Global REIT may spot an attractive distribution yield of 6.5%. However, if we look closer at its business, there may be some underlying risks that could affect future results. We should assess every aspect of the REIT before deciding if the risk-reward profile fits our investment objective.