“Management has been prudent on capital management, keeping gearing below 40% and refraining from acquisitions. The stock is trading at attractive levels at 30% below book, while offering stable dividend yields of [more than] 7%,” he writes.
SGREIT’s gearing remains “comfortable” at 36%, with a 83% debt hedge and interest costs will likely peak at the current 3.7% level, Natarajan adds.
For these reasons, Natarajan is keeping his “buy” call and 57-cent target price on SGREIT, which represents some 14% upside and a 2% ESG premium based on RHB’s proprietary methodology.
Leasing highlights
See also: Starhill Global REIT reports 1HFY2025 DPU of 1.80 cents, 1.1% higher y-o-y
SGREIT invests in retail and office buildings in Singapore, Australia, Japan and China.
The upside from SGREIT’s master lease extensions will kick in from FY2026, notes Natarajan. Katagreen (a wholly-owned subsidiary of its sponsor, YTL Corp) has exercised a call option to extend master leases at its Lot 10 asset in Kuala Lumpur for another three-year term starting July.
The total rental income for the new three-year term will be 6% higher than the existing figure. This follows the earlier-announced Toshin master lease extension for an initial period of 12 years commencing June. Toshin is the largest tenant accounting for 23% of income in 1HFY2025.
Annual base rent for the first three years will be higher at 1% above the existing base rental rate and the prevailing annual rental value at the start of lease as agreed upon by both parties.
Failing this, the rate will be based on average market rental values as determined by three valuers but not exceeding 125% of the first option.
In addition, there will be a profit-sharing agreement if revenue and profit margin thresholds are met, thereby providing additional upside, says Natarajan.
Overall, SGREIT’s portfolio committed occupancy rate remains high at a stable 97.7%, with near-full occupancy for the Singapore assets. This has been achieved by expanding its array of renowned featured fashion brands such as Burberry, Tod’s and Risis Atelier.
Management expects rent reversion to be in healthy double digits for retail and office lease renewals, notes Natarajan.
Wisma Atria improvements
SGREIT divested some 7,653 sq ft of net lettable area (NLA) on Wisma Atria’s 12th level for $16.1 million, or $2,100 psf, in December 2024.
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Management remains open to further such strata divestments if it receives good offer prices, says Natarajan.
Wisma Atria’s retail business has been benefitting from the ongoing asset enhancements. SGREIT will embark on more asset enhancement initiatives at Wisma Atria, which includes repurposing the level 7 car park for office use (some 3,250 sq ft) with an estimated return on investment of more than 8%. Management will also enhance drop-off points and tenant shopfronts.
“We expect these steps to boost the overall valuation of the asset,” says Natarajan.
SGREIT posted its results for 1HFY2024/2025 ended Dec 31, 2024 on Jan 23. For the half-year period, the REIT’s gross revenue increased by 1.7% y-o-y to $96.3 million while net property income (NPI) rose by 1.6% y-o-y to $75.6 million.
As at 4.28pm, units in SGREIT are trading flat at 50 cents.
