Robust Profile to Defend Against Sluggish Retail Outlook

29 November 2016

Credit Brief

Starhill Global REIT

Robust Profile to Defend Against Sluggish Retail Outlook   

Key Credit Highlights                                                                         

¨      We are mild overweight on Starhill Global REIT on its stronger financial and operating profile if compared to its other SGD REIT peers, though headwinds appear in the form of a weaker retail outlook in its key markets of Singapore and Australia. FY6/2016 revenue rose by 11.4% YoY to SGD220m mainly due to the full year contribution recognized from the Myer Centre Adelaide acquisition in May-2015 while its net property income rose 6.9% to SGD170.3m. As of June-2016, its credit profile has marginally improved, with Total Debt/ Assets at 35.0% (FY6/2015: 35.4%) and Total Debt/ EBITDA at 7.4x (FY6/2015: 8.0x), though EBITDA Interest Coverage deteriorated to 3.9x (FY6/2015: 4.5x). For its 1QFY6/2017 results, revenue was marginally down by 2.7% YoY to SGD55.3m mainly due to lower contribution from its Australia properties from unfulfilled vacancies in Myer’s Centre Adelaide, while net income declined 4.2% to SGD25.1m. Its credit profile was mostly unchanged, with Total Debt/ Assets at 35.0% and Total Debt/ EBITDA at 7.5x.

¨      Weaker retail conditions in SGREIT’s key markets. Despite YTD stronger tourist arrivals to Singapore having registered growth of 10.4% YoY, average retail rental rates in the Orchard precinct of Singapore have been slipping, falling by around 10.2% from peaks in Dec-2014 even as Singapore retail sales have averaged a decent 2.6% this year. Australia’s retail sales numbers have been on the downtrend, with the 12 month moving-average showing a decline since peaks in end-2014.

¨      Mature assets in prime locations coupled with strong operating metrics. Singapore contributes the bulk of SGREIT’s FY6/2016 revenue (over 60% of total revenue), followed by Australia (23%), Malaysia (12%) and the remainder from China and Japan. Its Singapore properties comprise of well-known retail spaces and office units at Ngee Ann City and Wisma Atria on Orchard Road.

¨      Hedging of interest rate and currency risk. SGREIT’s liabilities is insulated from interest rate movements as it hedges over 95% of its debt; with 81% of borrowings hedged via bonds and interest rate swaps while 15% are hedged via interest rate caps.

¨      Robust and healthy financial profile. With its recent SGD70m 10y issuance in Sept-2016, its leverage stands at around 35% (FY6/2016: 35.0%), slightly above the Singapore REIT average aggregate leverage of 34%. There is still substantial headroom for debt as its leverage levels are below the Monetary Authority of Singapore’s (MAS) aggregate leverage ceiling of 45%. The financial profile is boosted by SGREIT’s weighted average debt maturity of 2.9 years and high amount of unencumbered assets at over 70%.

¨      Support from long-term master leases. As mentioned above, SGREIT’s properties are established and it enjoys healthy aggregate occupancy rates of above 90%. It also benefits from master leases with long-term tenancies which contribute around 45% of total gross rent. This includes its Ngee Ann City, Starhill Gallery & Lot 10, as well as Myer Center Adelaide and David Jones properties.