YTL Starhill Global REIT - Wisma Atria turnaround still pending
- 2Q17 DPU of 1.26 Scts was 4.5% lower y-o-y, below our expectations.
- Weakness mainly attributable to Singapore.
- Turnaround signs yet to be seen at Wisma Atria.
- Lower TP by 4% and DPU by 1.5% on the back of a delayed recovery in Singapore. Maintain BUY.
BUY for diversification and high income visibility from master leases.
- We like YTL Starhill Global REIT (SGREIT) for its diversified portfolio of prime retail and office assets in the Asia Pacific region.
- Singapore, Australia, and Malaysia, which accounted for c,60%, c.20%, and c.15% of net property income (NPI) in FY16 (FYE June) respectively, limit exposure and thereby risk from any single country.
- With c.45% of top line derived from master leases or long leases, the REIT offers investors income stability and visibility, as well as upside potential from rental reversions embedded in the master leases.
Wisma Atria has yet to turn around but weakness should be largely priced in.
- Wisma Atria (Retail)’s occupancy has been staying at high 90% with the top 5% fluctuating. Decline in revenue in the next couple of years are expected as a result of Management converting level 1 from Fashion into F&B, which consists of stickier tenants but yields lower rents. The re-opening of Isetan could drive more footfall and may eventually translate into rents.
- With over 15% discount to a stable NAV, we believe the risk of Orchard Road retail has largely been priced in.
The sweetness of prudent payout.
- SGREIT has been retaining 3- 5% of distributable income to fund working capital, and it therefore has certain flexibility to manage future distributions without touching its capital.
- In addition, it has been paying management fees in cash, not units, hence there is no pressure from any dilution in its equity base.
- We revised our DCF-derived TP down by 3.9% to S$0.84 and trimmed DPU by c.1.5% to account for the delayed recovery from Wisma Atria.
- The REIT offers an attractive yield of c.6.5%, with a total potential return of c.15%.
- Maintain BUY.
Key Risks to Our View
- Upside risk from AUD and MYR currency appreciation. as c.34% of net property income is derived from assets in Malaysia and Australia.