Starhill Global REIT - OCBC Investment 2017-05-26: Near-term Challenges Likely Priced In

Starhill Global REIT - OCBC Investment 2017-05-26: Near-term Challenges Likely Priced In STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Near-term Challenges Likely Priced In

  • Divesting non-core assets.
  • Near-term challenges.
  • BUY with marginally lower FV.

Streamlining its portfolio 

  • Starhill Global REIT (SGREIT) recently divested its entire beneficial interests in the Harajuku Secondo Property for a cash consideration of JPY410.2m, or approximately S$5.1m. This transaction comes in at an attractive premium of 22.4% to the property’s latest independent valuation of JPY335.0m, and translates into an exit yield of 2.5%, based on its FY16 NPI figure.
  • The property is a 3-storey building for retail use which is located in the Harajuku district in Tokyo, Japan. It formed only 0.1% of SGREIT’s portfolio by asset value. SGREIT’s decision to divest does not come as a surprise to us, as management had been seeking opportunities to streamline its portfolio and pare down its non-core assets. 
  • Prior to this, SGREIT had divested the Roppongi Terzo property, also located in Tokyo, Japan, in Jan last year at a price of JPY2.5b. This came in at 2.5% higher than its last valuation and translated into an exit yield of 4.4%.

Operational weakness to persist in near-term… 

  • As a recap, SGREIT reported a muted set of 3QFY17 results recently, with NPI and DPU declining by 0.9% and 6.3% YoY to S$41.2m and 1.18 S cents, respectively. 
  • The weaker performance was attributed largely to lower contributions from Wisma Atria (both retail and office), Ngee Ann City (office), Myer Centre Adelaide and its China property and a larger S$1.4m of income available for distribution which was retained for working capital purposes (3QFY16: S$475k). 
  • However, there were also bright spots, as SGREIT’s Malaysia properties, Ngee Ann City (retail) and David Jones Building turned in better performances. 
  • Looking ahead, we expect operational challenges to persist in the near-term, although we believe this would be mitigated by a higher rental uplift of 6.12% from Aug 2017 as a result of the next lease review with David Jones.

…but likely priced in 

  • We pare our FY17 and FY18 DPU forecasts by 2.4% and 1.5%, respectively, as we factor in lower rental assumptions in our model.
  • Correspondingly, our fair value estimate is trimmed from S$0.82 to S$0.81. However, we maintain our BUY rating on SGREIT as we believe its softer growth prospects has been priced in by the market. 
  • SGREIT is trading at blended FY17/FY18F distribution yield of 6.6% and P/B ratio of 0.8x.

Wong Teck Ching Andy CFA OCBC Investment | 2017-05-26
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 0.81 Down 0.820