Starhill Global REIT - RHB Invest 2017-08-01: Navigating Challenges

Starhill Global REIT - RHB Invest 2017-08-01: Navigating Challenges STARHILL GLOBAL REIT P40U.SI

Starhill Global REIT - Navigating Challenges

  • Starhill’s FY17 results were slightly below expectations due to one-off items. 
  • Its SG retail portfolio continues to shine despite challenges while weaknesses were visible in the office segment. 
  • Overseas performance is expected to improve with occupancy and rent improvement in Australia, rejuvenation of Lot 10, and the moving in of an anchor tenant in China. Management would continue to be on the lookout for divestment of its Japan and China malls. 
  • With a limited upside ahead to our TP SGD0.81 (4% upside), we downgrade the stock to NEUTRAL, (from Buy) as it lacks a strong catalyst.

Wisma Atria retail sees better-than-expected positive rent reversion. 

  • In 4QFY17 (Jun), Wisma Atria achieved a positive rent reversion of +7.8% for ~30% of the mall’s NLA leased despite the challenging retail climate. Management explained that this is due to the prime location of renewed space (mall facade and basement) which still commands a healthy demand. 
  • Overall committed occupancy for the mall also increased 1.1ppts QoQ to 97.7%. Along with the Toshin master lease (5.5% base rent increase), this should contribute favourably to its bottomline. 
  • Looking ahead, ~20% retail leases are due for renewal. As these are in the mall’s relatively favourable location (basement and levels 2&3) we expect rent reversions to remain flattish-to-slight positive.

Weaknesses seen in SG office portfolio. 

  • SG office occupancy declined 2.7ppts QoQ to 92.9% with slight negative rent reversions recorded during the quarter. Management noted that office demand remains weak especially in the Orchard Road area and there has been some flight to quality with tenants looking to move to the newly completed central business district (CBD) offices. 
  • About 30% and 20% of office leases are due for renewal in Wisma Atria and Ngee Ann City office space respectively in FY18F (~average expiring rents of SGD10 psf), of which we expect negative rent reversions of 5-10%.

Overseas market update. 

  • Australia occupancy improved 2.1ppts on the back of higher occupancies at the David Jones building. Positive contributions are also expected from Aug 2017 with a 6.1% rent increase from its lease review. 
  • The rejuvenation of Lot 10 in Malaysia is expected to be complete by end-2017 and we expect shopper traffic to increase with the recent opening of the mass rapid transit (MRT) line. 
  • In China, new retail tenant, Markor International Home Furnishings Co Ltd, would move in on a long-term fixed lease by end-2017.

More divestments likely. 

  • Starhill Global REIT (Starhill) divested its Harajuku Secondo mall in Japan in May 2017 at a 22.4% premium to its latest valuation. It would be on the lookout to divest its remaining China and Japan malls at the right opportunity. 
  • Management noted that yield accretive options in the SG market are limited and is looking at Australia and Japan for acquisitions.

Downgrade to NEUTRAL as we see a limited share price upside. 

  • We have revised our FY18F-19F DPU downward by 3% to factor in the recent divestments and higher withholding taxes(Malaysia). Our SGD0.81 TP is based on a DDM methodology (COE: 7.4%, TG:1%). 
  • Key catalysts are the accretive acquisitions and better-than-expected SG retail and office sector demand. 
  • Key risks are the prolonged weakness in the Orchard Road retail and office market.

Vijay Natarajan RHB Invest | 2017-08-01
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.810 Same 0.810