Distribution Reinvestment Plan: Starhill Global REIT

Starhill Global REIT (SGReit) will be applying its very first Distribution Reinvestment Plan (DRP) to the H1 FY20/21 distribution where a total distribution of $0.0188 per unit to be paid out on 25 March 2021 was declared.

What is DRP?

DRP stands for Distribution (or dividend for non-trusts) Reinvestment Plan. Under the DRP, unitholders have the option to receive their distribution either in the form of units or cash or a combination of both. Participation in DRP is voluntary and unitholders will have to elect to participate.

The advantage of DRP is that unitholders can increase their unitholding without having to pay additional brokerage fees, and can potentially accumulate more units at a market discount typically up to 10%. For the company, DRP allows them to conserve cash which could be reinvested into the business.

The DRP issue price for each new unit offered under the DRP is $0.5123, which is hardly a discount based on today’s closing price of $0.52. The issue price is determined by the Manager which in this case set the discount of approximately 2% to the volume-weighted average traded price during the price determination period (10 days prior to and ending on the Record Date).

Factors affecting take-up rate of DRP

There are a couple of factors that can affect the take-up rate of DRP as unitholders may or may not choose to increase their unitholding depending on a combination of these factors.

1. Market outlook

While some businesses flourished during the COVID-19 outbreak, others were negatively impacted and suffered heavy losses and this includes the retail industry. As a retail REIT comprising mid to upscale shopping malls and offices in prime shopping districts in Singapore, Malaysia, and Australia, China, and Japan, SGReit was not spared. Revenue and net property income declined 8.6% and 12.3% respectively from the same period last year, which is attributed to rental reliefs and arrears to affected tenants during the COVID-19 pandemic.

With shopping malls unable to operate during lockdowns, many consumers have turned to e-commerce to satisfy their retail needs. Pressure from e-commerce retailers could threaten the viability of brick-and-mortar retailers which will not bode well for tenants at SGReit if they choose not to evolve to strengthen their business or existing master tenants choose not to extend their lease altogether.

Furthermore, travel restrictions remain and do not appear to be easing any soon. With decreased tourist arrivals that make up the customer base for SGReit’s assets, the retail sector would have to be supported by its domestic market and SGReit could potentially face a slower recovery than their suburban counterparts who are less reliant on tourist spend. Therefore depending on the current market outlook of where the retail industry is heading, unitholders may base their decision off market sentiments to elect for DRP.

Source: Starhill Global REIT 1H FY20/21 Financial Results Presentation Slides

2. Growth potential of the company

There may still be some headroom for growth locally as SGReit could acquire the remaining strata lots of Wisma Atria that is currently owned by Isetan. By having full ownership of the mall, SGReit may be able to have more control to reposition the mall to shoppers back.

Alternatively, SGReit may also choose to reduce concentration risk in the retail sector (currently 85% of the REIT’s revenue is contributed by retail, with about 50% of revenue from Wisma Atria and Ngee Ann City) and increase its commercial assets instead to bolster weaker earnings from its retail assets. Apart from the negotiation between Wisma Atria and Isetan which did not reach an agreement, there seems to be no other news about SGReit actively seeking to grow its portfolio. 

Personally, I believe that brick-and-mortar retailers will not be completely driven out by e-commerce as certain brands targeting different market segments still require the in-store shopping experience which is part of their brand strategy. There is still some demand for offline shopping evidenced by huge weekend crowds in town and these traditional retailers are not completely obsolete yet. So although there may be some competition, these retailers will still be around for some time and retail REITs, especially those with assets in heartland areas, will continue to survive but it will be up to the Manager to ensure that its malls remain relevant, attractive, and profitable through planned redevelopment or asset enhancement initiatives.

3. Distribution history

SGReit’s latest annualised distribution yield of 7.2% (at the time of writing) may appear comparable to its peers and even high but that is primarily attributed to its depressed share price. Since I began investing in SGReit, its share price has been declining and distribution income has fallen steadily with every distribution announcement since 2017.

Source: Starhill Global REIT 1H FY20/21 Financial Results Presentation Slides

Its latest distribution of $0.0188 per unit represents a 16.8% drop in the same period a year ago.  As an unhappy unitholder, this is a red flag and signal of weak operational or managerial performance. I intend to close my position in SGReit but I am unable to find another investment to substitute so I am using this as a high yield fixed deposit until I find something better.

How is DRP different from Scrip Dividend Schemes?

The main difference between DRP and Scrip Dividend Schemes is share dilution for the latter.

For Scrip Dividend Schemes, new shares of the company are issued to shareholders. Issuing new shares expands the equity pool of the company and as a result, may lead to share dilution for those who do not elect for scrip. Whereas for DRP, existing shares of the company are purchased from the market or from the company’s reserves instead and issued to shareholders, so there is no resulting share dilution.

Will I be applying for the DRP?

Although I will be able to average down my cost price, I will not be electing for DRP as I am doubtful of the Manager’s capabilities and already have one foot out the door. Despite having high quality assets in Singapore that forms the backbone of its portfolio (without which I would not have even it given a second look), the Manager has done little to prove its worth and give back to unitholders. Coupled with the current market environment and challenges for the retail industry as a whole, I would prefer to receive my distributions in cash to deploy into other more fruitful investments instead of increase my unitholding in SGReit.

Disclaimer: I am vested in Starhill Global REIT at the time of writing.

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