YTL Starhill Global REIT (SGREIT SP) - DBS Research 2017-04-28: Wisma Atria Remains On Watch List

STARHILL GLOBAL REIT P40U.SI

YTL Starhill Global REIT (SGREIT SP) - Wisma Atria Remains On Watch List

3Q17 top line down 1%, DPU down 6.3% y-o-y.
Performance was mainly dragged down by Wisma Atria, Ngee Ann (Office), and China property.
Maintain BUY as negatives are largely priced in with price trading at c.15% discount to NAV.

3Q17 revenue was S$53.3m, down 0.6% y-o-y. NPI was S$41.2m, down 0.9% y-o-y. The decline was mainly due to lower contributions from Wisma Atria, Ngee Ann City (Office), Myer Centre Adelaide and Renhe Spring that more than offset the stronger performance of Ngee Ann City (Retail), Malaysia Properties and David Jones Building.
DPU for the quarter was 1.18 Scts, down 6.3% y-o-y. The larger decline was a result of higher interest expense, and lower payout ratio of 95% versus 98% in 3Q16.
9M17 DPU represents 73% of our FY17 full-year forecast, slightly missing our expectations.

Revenue from Singapore properties (62.5% of portfolio) was 0.6% higher y-o-y. NPI was 0.5% higher, mainly due to increase in base rent from the Toshin master lease at Ngee Ann City (Retail) from June 2016, partially offset by lower occupancies for Singapore offices and lower average rents at Wisma Atria (Retail).
Office occupancy at both Wisma Atria and Ngee Ann declined from full to 93.1% and 95.8% respectively. The changes are less significant on a quarterly basis as 2Q17 occupancy for the properties were 96.6% and 95.3% respectively.
Wisma Atria remains weak as retail NPI declined by 1.9% yo-y to S$10.5m, while office NPI dropped 8.0% y-o-y to S$2.0m. On the other hand, NPI from Ngee Ann (Retail) improved by 5.7% to S$10.5m.
We understand the drop in earnings from Wisma Atria (Retail) was mainly attributed by replacing fashion with lower-yielding F&B tenants which we believe is a necessary strategy to generate stable returns.
As for its office vacancy, we understand that the majority of the tenants who moved out are from the Oil & Gas sector which we estimate to contribute around only 10% of the office space and hence the impact will not be material.

Revenue from Australia properties (23.0% of portfolio) was 1.8% higher y-o-y while NPI remained stable with the AUD appreciation against the SGD. Redevelopment at Plaza Arcade will commence in 4Q17 and is scheduled for completion by 1Q 2018. The works will continue to disrupt Australia’s revenue contribution.
Malaysia properties (12.5% of portfolio revenue) edged 2.3% higher y-o-y and NPI was 3.2% higher, thanks to the extension of master leases at higher rental rates from June 2016, partially offset by deprecation of MYR against SGD. Rejuvenation at Lot 10 with expected capital expenditure of c.RM20m, to be funded by existing borrowings, is timed in conjunction with the completion of the Sungai Buloh-Kajang Line (MRT) in July 2017 to tap into an enlarged population catchment to be served. The AEI is targeted to complete by end-2017.

China and Japan contributed 2.0% of portfolio revenue. NPI from these two properties decline to S$0.35m from S$1.0m a year ago, mainly due to the repositioning of Renhe Sping Zongbei Property in Chengdu.
The mall has been handed over to the new long-term tenant, from the furnishing industry, and renovation works are expected to start in 4Q17.

No debt financing requirement is needed until May 2018. Debt maturity profile stays healthy at 2.8 years and gearing remains at a comfortable level of 35.3%.
NAV stays at S$0.91.

Although no signs of recovery have yet to appear, we believe investors should not be overly alarmed as the current price of S$0.78 (0.86x P/NAV) has largely factored in a weak outlook for the retail sector on Orchard road for the next couple of years.
SGREIT is the only retail S-REIT with the majority of its portfolio earnings derived from Singapore and is trading significant below NAV. Due to the stability provided by its master lease profile (46% of gross rent), we believe the discount is unjustified.
With forward yield of 6.6% and price upside of over 6%, we maintain our BUY call.

Singapore Research DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-04-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.83 Down 0.840