Starhill Global REIT - DBS Research 2019-04-29: Written In The Stars


Starhill Global REIT - Written In The Stars

  • Starhill Global REIT's 3Q19 DPU of 1.10 Scts (+0.9% y-o-y).
  • Higher footfall and tenant sales trends imply ongoing efforts to reposition assets are starting to bear fruit.
  • Potential development at Wisma Atria a catalyst.
  • Maintain BUY; Target Price raised to S$0.80.

Proxy to the recovery at Orchard Road; maintain BUY.

  • We like STARHILL GLOBAL REIT (SGX:P40U) for its diversified portfolio of prime retail and office assets in the Asia Pacific region anchored by two visible Orchard Road Malls – Wisma Atria and Ngee Ann City.
  • Malls in Orchard are seeing some of the best reversions year-to-date. While both properties are currently master leased, we note that the Ngee Ann City property will soon be up for rent review and may deliver a positive surprise.
  • The extension of its Katagreen master lease in Malaysia promotes further income visibility and certainty, which augurs well for Starhill Global REIT’s ability to deliver steady dividends over FY19-20F.
  • We have raised our Target Price to 80 Scts after rolling forward valuations.

Where We Differ: More conservative estimates than consensus.

  • Our DPU projections for the next two years are slightly lower compared to consensus mean. We are less optimistic on the outlook of Starhill Global REIT’s retail portfolio in Singapore, in particular Wisma Atria, where operating metrics have been soft but believe the bottom could be near.
  • Wisma Atria has made material changes to the trade mix on the ground floor which we believe will augur well for the mall.

Potential catalyst: Development opportunities.

  • Executing on the proposed development at Wisma Atria (unutilised GFA of up to 100,000 sqft) will be a value-enhancing strategy in our view, pending approvals from the relevant authorities and partners.
  • We understand that the manager is in regular discussions and the execution of this development could yield upside to both NAV and DPUs in the medium term, which is not priced in at current levels.


  • BUY; DCF-based Target Price is raised to S$0.80.
  • Our DCF assumes a 10-year risk-free rate of 3.0% and a 50-bp higher cost of debt.

Key Risks to Our View:

  • Slow retail recovery in Singapore. A prolonged slow retail recovery in Singapore dragged by a fall in tourist arrivals could be detrimental to Starhill Global REIT’s distribution prospects.

WHAT’S NEW - Starhill Global’s 3Q19 DPU of 1.10 Scts in line

3Q19 DPU of 1.10 Scts (+0.9% y-o-y)

  • The decline in Starhill Global REIT’s gross revenue and NPI moderated from -2.7% and -2.4% in the previous quarter to -0.9% and -1.8% y-o-y in 3Q19, resulting in top line of S$51.3m and NPI of S$39.6m.
  • This was mainly due to lower contributions from Wisma Atria, weakness in the AUD vs SGD, and generally higher property expenses for the group, though partially mitigated by higher contributions from Myer Centre Adelaide, Plaza Arcade and Ngee Ann City (Office).
  • Higher revenues received from the office portfolio in Singapore were mainly driven by higher occupancy rates.
  • Due to the weaker NPI, distributable income declined by 1.4% y-o-y to S$25m and after income retained, amounted to S$24m (+0.9% y-o-y) which translates into DPU of 1.10 Scts (+0.9% y-o-y, -2.7% q-o-q).
  • Overall 9M19 DPU of 3.38 Scts formed > 73% of our FY19F forecasts, which was largely in line.

(-/+) Mixed performance; but benefits of ongoing tenant remixing and asset repositioning efforts are starting to filter through

  • At 62% of top line, Singapore properties remain the driver of earnings. However, their outlook is still mixed.
  • Portfolio occupancy continued to nudge higher from 94.3% (2Q19) to 95.7% (3Q19). Occupancy rates for Australia were the most improved, mainly as actual occupancy for its Office segment was lifted to 74.9% in 3Q19.
  • While occupancy rates for Singapore properties were generally stable, we note that committed occupancy for Retail has risen to 99.7%, albeit at a softer rent for Wisma. Committed levels for Office also rose to 94.4% vs 93.6% previously.
  • Wisma Atria continued to see growth in tenant sales, which increased 4.9% y-o-y in 3Q19.
  • While rental reversions are understood to be negative across its retail space - largely due to the ongoing soft operating environment, they have started to moderate.
  • Looking ahead, we expect to still see slight negative rental reversions as the strategy employed by the manager is to continue prioritising occupancy over rents in order to retain and attract tenants. However, we note that the Toshin master lease for Ngee Ann City, which currently represents c.22% of GRI, is due for a rent review in June 2019, which may deliver upside from higher rents.

Australia assets offer stability

  • Long-term leases with David Jones and Myer, which account for over 54% of Australia GRI, help augment earnings stability for Starhill Global REIT’s Australian portfolio.
  • Occupancy rates for Perth properties remained resilient at 97.6%, while Myer Centre Adelaide continued to push through with occupancy improvements to 89.9% (3Q19) from 84.4% (2Q19), after a new anchor tenant commenced its lease at the Office space.
  • Meanwhile, occupancy for the retail portfolio stood at 95.8%.

Extension of Malaysia master lease provides well-needed income visibility

  • To recap, Starhill Global REIT announced the entry into new conditional master leases for Starhill Gallery and Lot 10 Mall located in Bukit Bintang, Kuala Lumpur in March. These properties contribute c.11.8% of Starhill Global REIT’s FY18 property value and an estimated c.13.5% of GRI in 3Q19.
  • Due to expire in June 2019, the new proposed master leases will further extend the WALE for its properties in Malaysia by 19.5 years and 9.0 years for Starhill Gallery and Lot 10 Mall respectively. The combined new master lease rent (upon completion of the AEI) is estimated to be 1.5% higher (or +RM1.3m) than the existing master lease rental level.
  • Coupled with in-built periodic rental escalations (every three years) over the term of the new master leases, this provides Starhill Global REIT with a steady growth profile over time. We understand that the new rent levels are in line with independent appraised valuers' rent levels that the REIT is able to achieve at the Bukit Bintang vicinity.
  • In conjunction with the agreement for the proposed extension of the master lease at Starhill Gallery, Starhill Global REIT will undertake a two-year asset enhancement initiative to refresh and reposition the ageing mall, which will cost an estimated RM175m. During AEI, the Sponsor will also provide a rent rebate of approximately six months’ rent p.a. (or RM26m a year), which will help to mitigate disruption in earnings as the asset undergoes transformation.
  • We believe the defensive capex and master lease extension provides well-needed long-term income visibility and certainty for Starhill Global REIT’s Malaysian assets. These properties had generally lagged in performance given the increasing competition in the Bukit Bintang area over time with the main competitor Pavilion Mall (just next door) being the main draw for shoppers.
  • New upcoming supply in the vicinity will further shield the properties from downside reversion in rents.

Small but steady income stream from China and Japan Properties

  • China and Japan Properties contributed S$1.2m (~2.3% of GRI) in 3Q19. Meanwhile, NPI contributions from Starhill Global REIT’s China and Japan properties increased 4.5% y-o-y to S$0.9m in 3Q19, mainly due to lower operating expenses.

Stable financial metrics

  • Gearing remains stable at 35.7% with all-in interest cost standing firm at 3.29%.
  • Post asset enhancement works for Starhill Gallery, is estimated to be 1% higher on a pro-forma basis.
  • Starhill Global REIT has 91% of its interest cost fixed/hedged with a weighted average debt maturity of 3.0 years.

Carmen TAY DBS Group Research | Derek TAN DBS Research | 2019-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 UP 0.750