YTL Starhill Global REIT - DBS Research 2017-08-01: A Mixed Picture

YTL Starhill Global REIT - DBS Vickers 2017-08-01: A Mixed Picture STARHILL GLOBAL REIT P40U.SI

YTL Starhill Global REIT - A Mixed Picture

  • Starhill Global REIT (SGREIT)'s NPI flat in 4Q17, down 2% in FY17A, mainly due to lower contribution from Singapore offices and Australia.
  • FY17A DPU is 4.92 Scts, slightly missing our forecast by 4%.
  • Wisma Atria registered positive rental reversion with improved occupancy.
  • Cut DPU forecast by 5.5-6.5%, revised TP down by 1.9% to S$0.82; forward yield 6.4%; maintain BUY.



BUY for diversification and high income visibility. 

  • 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.65%, c.20%, and c.15% of net property income (NPI) in FY17 (FYE June) respectively, limit exposure and thereby risk from any single country. 
  • With c.45% of top line derived from master leases, the REIT offers income stability, visibility, as well as upside potential from rental reversions embedded in the master leases.


WHAT’S NEW


FY17A DPU missed our forecast by 4% due to weaker performance from Singapore and Australia 

  • NPI flat in 4Q17, lower in FY17A, missing forecast by 4%. Revenue was S$53.7m and NPI was S$41.4m in 4Q17, flat yo-y.
  • The declines in Singapore and Australia properties’ contributions were compensated by the rise from Malaysia properties. 
  • DPU for 4Q17 was 1.18 Scts, 7.2% lower y-o-y and flat q-o-q. The decline in y-o-y DPU was mainly due to the higher withholding tax for Malaysia Income (c.S$2m p.a.) due to the change in tax regime, non-cash income resulting from the new tenant’s fitting out in China and slightly higher cash retention (S$0.6m in 4Q17 vs S$0.3m in 4Q16). 
  • FY17A full-year gross revenue was 1.5% lower and NPI was 2.0% lower, y-o-y. Lower contributions from most properties except Ngee Ann City’s retail anchor space, Malaysia properties and David Jones, Australia. 
  • FY17A full-year revenue, NPI and DPU all represent 96% of our forecast, roughly in line (c.1.5% lower) with consensus.

FY17A NPI declines from Singapore and Australia more than offset the increase from Malaysia. 

  • On a full-year basis, NPI from Singapore properties increased by 0.3% to S$107m, mainly due to increase in base rent from Toshin master lease at Ngee Ann City from June 2016 as well as the recognition of S$1.9m pre-termination rental compensation from Wisma Atria. Excluding the latter, full-year NPI from Singapore would have been down by 1.5%, due to lower occupancy for the office space as well as lower average rents from the retail space at Wisma Atria. 
  • NPI from Australia properties was S$31.5m, 4.9% lower y-o-y, mainly due to Plaza Arcade redevelopment works and vacancies at Myer Centre Adelaide.
  • NPI from Malaysia properties was S$27.3m, 6.4% higher thanks to the extension of master lease at higher rent from June 2016. 
  • NPI from China and Japan only contributed 1.4% to the portfolio's total. Harajuku Secondo from Japan, a noncore asset, was divested in May 2017 for JPY410.2m (or S$5.1m). The divestment asset contributed to less than 0.5% of the top line.

Office Occupancy dip at Wisma Atria and Ngee Ann City. 

  • While consumer sentiment remains weak, some improvement is seen at Wisma Atria (retail) as its occupancy edged up from 96.6% to 97.7% in 4Q17. The mall has also achieved a positive rental reversion of 7.8% for leases committed in the quarter, which accounted for c.30% of the mall’s NLA - most leases renewed this quarter were not from the ground floor where the preceding rentals were not under pressure. 
  • Going forward, we expect low positive rental reversions at Wisma to continue given most of the leases on the challenging ground floor have already been renewed. 
  • Office occupancy at both Wisma Atria and Ngee Ann City continued to slide from 93.1% to 92.1% and from 95.8% to 93.5% respectively, over the quarter. Lower NPI margin will be expected as a result of lowering rents as the Manager defends occupancy.
  • Ngee Ann City (retail) remains fully occupied. Looking ahead at lease expiry in FY18, 19.5% retail space and 29.8% office space will be due for Wisma Atria, and 3.7% from retail and 20.4% from office for Ngee Ann City.

Redevelopment updates. 

  • Plaza Arcade redevelopment has been commenced and is scheduled for completion by 1QFY18 to fit in a new international anchor tenant, revenue disruption is expected next quarter. Though not disclosed officially, the media has reported that the new anchor tenant is likely to be the first Uniqlo in Australia. We believe the brand will attract shoppers and bring competitive advantage to Plaza Arcade over its neighbouring malls. 
  • Lot 10 rejuvenation to tap on enlarged catchment. The second phase of Sungai BulohKajang MRT line opened in July 2017, and is estimated to serve 400,000 commuters daily. The rejuvenation of Lot 10 is due in 3QFY18 (end-2017) and has been timed to tap into the enlarged population catchment.

Flat property revaluation as gains from cap rate compression and AUD appreciation offset loss from Malaysia properties. 

  • Cap rate compression in Singapore brought revaluation gains in retail, despite lower cash flow assumptions in the office sector. Australia properties values were lifted by both underlying valuation and currency appreciation, while the opposite applied to Malaysia properties. NAV remains at S$0.91.

Proactive capital management. 

  • The REIT secured commitment to early refinance A$145m and S$450m loans ahead of their maturity, extending average debt maturity from 2.6 years as at 30 June 2017 to c.4.5 years post refinancing. Gearing is stable at 35.3%. 99% of debt has fixed or hedged interest rates.


With c.15% discount to NAV, weakness should be priced in.

  • Wisma Atria (Retail)’s occupancy has been staying at a high 90% with the top 5% fluctuating. Declines 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 and new concepts introduced could drive more footfall and may eventually translate into rents. 
  • With the current price at c.15% discount to a stable NAV, we believe the risk of Orchard Road retail has largely been priced in.


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 deploying its capital. 
  • In addition, it has been paying management fees fully in cash, not units, hence there is no pressure from any dilution in its equity base.


Valuation

  • Cut DPU by 5.5-6.5% to account for weaker outlook in Singapore and Australia properties, TP is revised down by 1.9% to S$0.82 from S$0.84. 
  • The REIT offers a forward yield c.6.5% and total potential return of c.11%. Maintain BUY.


OUR VIEW 

  • Wisma Atria (retail) remains on the top of our watch list. The most challenging renewals from the ground floor are now over and hence low single-digit reversion could be expected going forward, although we still need to see occupancy improvement before we turn positive. We believe the current price of S$0.78 (0.86x P/NAV) has more than factored in the weak outlook in Singapore. 
  • SGREIT is the only retail S-REIT with the majority of its earnings derived from Singapore that is trading significantly below NAV. Due to the earnings’ stability provided by its master lease profile (47% of gross rent), we think the discount is unjustified.
  • We cut DPUs by 5.5-6.5% to account for lower rental outlook from Singapore offices and Australia properties. Target Price is lowered by 1.9% to S$0.82 from S$0.84. Maintain BUY.


Key Risks to Our View

  • Upside risk from AUD and MYR currency appreciation, as c.35% of NPI is derived from assets in Malaysia and Australia.



Singapore Research DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-08-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.820 Down 0.830



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