Starhill Global REIT - Revamping For a Fresh Look
- We expect Starhill Global REIT’s (Starhill) portfolio to remain resilient despite headwinds, due to positive uplift from its master leases.
- Asset enhancements should benefit unit holders in the long run although expected to have short-term negative impact on DPU.
- Management is open to recycling capital from some of its underperforming assets given the right opportunities.
- Valuation remains attractive with FY17F yield of 6.7% and P/BV of 0.8x. Maintain BUY with revised TP of SGD0.81 (from SGD0.84, 7% upside).
Master leases lends stability.
- Key DPU drivers ahead are positive contributions from 5.5% base rent increase from Toshin master leases in Singapore (beginning Jun 2016) and 6.7% rental uplift from master leases at its Malaysian malls. The new lease-term extends for three years, with next rent review due in Jun 2019.
- About 46% of Starhill Global REIT’s (Starhill) gross rents is derived from master leases.
Revamping malls to boost long-term returns.
- Redevelopment works at Plaza Arcade, Perth would commence in mid-2017 and is expected to be completed by 1Q18. As a result, occupancy is expected to dip in the short term to ~60% from current 76%.
- In Malaysia, Lot 10’s rejuvenation is expected to be completed by end of 2017.
- Renhe Spring Zongbei property (RSZP) in Chengdu has ceased operations in preparation for handover to new tenant, Markor International Home Furnishings Co Ltd, which is expected to move in during the current quarter, and has signed a long-term fixed-lease providing stability.
Expect mixed-bag of rent reversions.
- About 6% of its Singapore retail leases are due for renewal in FY17 for which we expect flat to slightly positive reversions.
- Despite a tough retail climate, its malls achieved positive reversions of +2.5% in 2QFY17 with occupancy of 98.9%.
- Negative rent reversions (~2- 5%) are expected for its upcoming office lease renewals owing to competition.
- For 2QFY17, rent reversion for its Singapore office portfolio stood at -1.6%.
Maintain BUY with slightly lower TP of SGD0.81.
- We have revised down our FY17F/18F DPU forecasts by 5%/6% factoring in disruption from redevelopment works and lower rents for office properties.
- Our TP is based on DDM methodology (COE: 7.4%, TG: 1%).
- While near-term DPU is likely to be impacted by asset repositioning, its resilient master leases and high portfolio occupancy should help Starhill sail through current challenges, in our view.