YTL Starhill Global REIT - DBS Research 2016-04-01: More upside from Toshin renewal

STARHILL GLOBAL REIT P40.SI

YTL Starhill Global REIT - More upside from Toshin renewal

We believe that the upcoming rent review for Toshin lease at Ngee Ann City is a near term catalyst. This rent renewal will have a significant impact on distributions as Toshin accounts for c.19% of top line in FY16F. Toshin renewed the lease for a further 12 years starting Jun’13.
The rent review mechanism only allows for upward adjustment in rents, capped at 25%. This implies that the REIT’s earnings growth profile is projected to growing at a steady 2-3% rate in the coming two years.

In our estimates, we have assumed a 6% increase come Jun’16. This will bring estimated rents from S$15psf/mth to close to S$16psf/mth, which is in line with median rents for Orchard Road. We believe this is a conservative estimate.
Upside might potentially come from
1. revised rents being pegged close to a recent media report of a market study by Ngee Ann that a fair “market rent” of c.S$19.83 psf for the property and
2. nearby shopping malls (Paragon, Mandarin Gallery, Wisma Atria) where average retail rents range from S$20psf/mth onwards.
Our bull case scenario of a 20% uplift in rents (to S$18psf) for Toshin lease to mean a further 5% lift to F17F DPU estimates.

With the strong uplift in S-REIT prices in recent times, driven by the large caps S-REITs, we believe 2nd liners like SGREIT (0.9x P/NAV, FY16-17% yield of 6.8%-7.0% should play catch up.
We believe uncertainties from the group exposures in Malaysia and Australia are unfounded given
1. recent renewal of its master-lease for Lot 10 and Starhill Gallery in Malaysia mean minimal downside risk and
2. planned AEI at Plaza arcade from FY17F onwards implies further upside to distributions in the medium term.

Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2016-04-01

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.84 Same 0.84