Starhill Global REIT - OCBC Investment 2017-02-02: Stifled by challenging operating environment

STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Stifled by challenging operating environment

Starhill Global REIT (SGREIT) reported its 2QFY17 results which fell short of our expectations.
Gross revenue fell 2.8% YoY to S$54.1m, while NPI dipped 5.4% to S$41.4m. This was attributed largely to weaker contributions from Wisma Atria (both retail and office), Ngee Ann City (office) and its Australia, China and Japan portfolios.
Consequently, DPU for the quarter came in at 1.26 S cents, which represented a decline of 4.5% YoY.
On a 1HFY17 basis, SGREIT’s gross revenue and NPI decreased by 2.7% and 3.5% to S$109.3m and S$84.3m, respectively. The latter formed 46.3% of our full-year forecast.
DPU slipped 2.7% to 2.56 S cents and made up 47.8% of our FY17 projection.

Operationally, SGREIT’s Singapore retail portfolio registered positive rental reversions of 2.5% for leases committed in 2QFY17.
Wisma Atria (retail) saw higher shopper traffic of 2.1% but tenant sales was down 2.0% YoY. NPI for its Singapore retail portfolio fell 2.2% YoY, as weakness at Wisma Atria (retail) was partially mitigated by rental uplifts from the Toshin master lease at Ngee Ann City.
SGREIT’s Singapore office portfolio suffered a 7.7% YoY drop in NPI in 2QFY17 due to lower occupancy (95.9%, -4.1 ppt YoY) and negative rental reversions of 1.6%. The operating environment remains challenging as a number of retailers consolidated their businesses.
As for SGREIT’s overseas operations, overall NPI in 2QFY17 fell 8.8% YoY to S$15.0m, as improvement in NPI in Malaysia (+9.3% YoY) was offset by lower contributions from Australia, China and Japan. Australia was impacted by higher expenses and lower occupancy from Myer Centre Adelaide office and lease terminations at Plaza Arcade leading up to the planned redevelopment works.

Taking this set of results into account, we pare our FY17 and FY18 DPU forecasts by 5.3% and 5.8%, respectively.
We also factor in a higher risk-free rate assumption of 2.7%, versus 2.4% previously, due to a higher interest rate environment.
Consequently, our fair value estimate dips from S$0.86 to S$0.82. However, we maintain BUY on SGREIT, as blended forward FY17/18F distribution yield of 6.7% remains attractive, in our view.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-02-02

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 0.820 Down 0.860