Cracks appearing in Starhill Global Reit

For some of you who have been following my blog posting, you may remember that I did a blog post about Starhill Global Reit four months back. Click here to access it

In that post, I mentioned the reasons why I was attracted to Starhill Global Reit. To recap, they are:

  1. Excellent Properties
  2. A stable and experienced management
  3. No rights issue & consistent dividend payment
  4. They are financially strong
  5. There is room for the DPU to grow further

I even shared that I would purchase more Starhill Global Reit shares at a price below 73.5 cents. At this price level, I felt it would have already offered a good safety margin.

With the release of their latest annual report, I updated my database with their 2016/17’s financials.

Surprise, surprise ! I discovered a few things that started to flash warning lights at me.

These surprises were:

(1) For the first time since 2010, they had reduced their dividend per share from 5.15 cents to 4.92 cents. Most companies will like to maintain if not grow their dividend year on year. The market tends to associate any reduction in dividend as a signal from the company that they now have less propensity now or in the future to pay the same dividend. Is Starhill management thinking the same?

(2) Net Operating Cash Flow has been reducing for the last 3 years. It dropped from 213 Mil in 2015 to 155 Mil in 2016 and 141 Mil in 2017. With a relatively unchanged interest expense, the debt servicing ratio has increased from 22% in 2015 to 28% in 2017. In other words, 28% of the cash they generated now needs to be used to pay the interest for their loans. This means less cash is available to be distributed to shareholders and it increases the credit risk.

(3) Consequentially, their interest coverage ratio dropped from 5.2 times in 2015 to 4.2 times in 2017. Although it is still relatively healthy, the steepness of the drop is a major concern.

(4) The fair value of their investment properties decreased for the first time since 2010. It decreased by 16 Mil in 2017. The consistent growth in their properties values and the Net Asset Value appeared to have come to a stop. With a lower valuation of their properties, their gearing ratio will increase and that will not help them to secure low interest loans.

(5) For 4 years in the row, AIA, which is the other substantial shareholder to YTL, has been reducing their holding in Starhill Global. They used to own as much as 10% of Starhill in 2012. In 2017, their holding is now 7.6%, 0.7% lower that last year.

(6) Not much has been talked about the redevelopment and asset enhancement of their Australian assets in their latest annual report. I used to think that this may provide the impetus for their next stage of growth but it looks like it may not happen now.

So, what does all these mean to me?

I am losing a fair bit of optimism on Starhill Global now.

I will need to pay more attention to the developments in Starhill Global given my above-average exposure to it.

In terms of entry point, I have re-calculated it and now I will only enter if the price is below 71.5 cents. (it used to be 73.5 cents)

At 71.5 cents and based on current DPS of 4.92 cents, that should give me a 75% probability (i.e. good safety margin) of earning a dividend yield that exceeds anyone who buy Starhill Global Reit in any single day in the last 3 years.

Have you done any analysis on Starhill Global too? Will be very happy to receive your views and inputs to this as well.

Thanks.

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5 thoughts on “Cracks appearing in Starhill Global Reit

    1. Thanks for the comment. First, I believe that people invest in Reits for dividend. Hence, there is a “mean” dividend return that people will ask for. For example, people will ask for a higher dividend yield for Soilbuild Reit than for Parkway Life Reit. So, I use the last 3 years dividend distribution and share price to develop a bell curve. So, if I can buy the share at a price that will give me a dividend yield that is >75% of people then, the chance of me making capital gain is higher and the chance of me losing money is less. Hope the above explains. If not, you can try my post on Reversion to Mean. Thanks

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