S&P downgrades Starhill Global REIT outlook to negative on leverage concerns

Starhill Global REIT mall Wisma AtriaStarhill Global REIT mall Wisma Atria. Note: Photo taken pre-Covid

S&P Global Ratings revised Starhill Global REIT’s ratings outlook to negative from stable on Tuesday on the expectation the trust’s financial leverage will be stretched over the next 18 to 24 months.

“We expect SGREIT’s leverage ratio to deteriorate to below our downgrade trigger because of an asset-enhancement initiative (AEI) concerning its Starhill Gallery in Malaysia,” S&P said in a statement on Tuesday.

“The rental rebates given to the Starhill Gallery tenant during the two-year AEI period will be a drag on the funds from operations,” it added.

On Monday, Starhill Global REIT said the AEI was expected to cost 175 million ringgit, or around S$58.1 million, and would include a revamped mall entrance, refreshed interiors and converting the top three floors into hotel rooms as an extension of the adjoining JW Marriott Hotel Kuala Lumpur.

“Material delays or cost overruns, or underperformance at SGREIT’s other assets that result in a drop in net property income, could also lead
credit metrics to remain sub-par,” the ratings agency added.

S&P affirmed Starhill Global REIT’s issuer credit rating and the rating on its guaranteed senior unsecured notes at “BBB-plus,” as it expected the secured occupancy and higher rents on lease renewal after the AEI’s completion in 2021 would lead to a recovery in leverage ratios by 2023.

“Over the longer term, the AEI should enhance SGREIT’s asset quality and contribute more resilient recurring income,” S&P said. “Over the AEI period, we expect positive rental reversions in SGREIT’s Singapore retail assets to temper the effect of rental rebates.”

In a filing to SGX on Tuesday, Starhill Global REIT said, “The credit rating assigned by S&P is based on the views of S&P only. A rating is not a recommendation to buy, sell or hold securities.”

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