Starhill Global REIT - OCBC Investment 2019-04-29: Not The End Game… There’s More To Come


Starhill Global REIT - Not The End Game… There’s More To Come

  • Starhill Global REIT's 3QFY19 DPU rose 0.9% y-o-y.
  • Tenants’ sales continued recovery.
  • Earnings visibility from master lease renewals.

3QFY19 results within our expectations

  • STARHILL GLOBAL REIT (SGX:P40U)’s 3QFY19 results met our expectations. Although gross revenue and NPI fell 0.9% and 1.8% y-o-y to S$51.3m and S$39.6m, DPU rose 0.9% to 1.10 S cents due largely to lower income tax expenses and a higher payout ratio of 95.8% (3QFY18: 93.7%).
  • We note that DPU grew positively on a y-o-y basis for the first time since 2QFY16, albeit from a low base.
  • For 9MFY19, Starhill Global REIT’s NPI and DPU slipped 2.2% and 2.3% to S$119.5m and 3.38 S cents, respectively, with the latter forming 73.3% of our FY19 forecast.

Wisma Atria offers upside potential after challenging period

  • Wisma Atria Property (Retail)’s physical occupancy fell 1.8 ppt q-o-q to 91.7%, but committed occupancy was much higher at 99.0% as management offered more competitive rents to spur demand (high single-digit negative rental reversions). As most of the committed leases would commence operations in 4QFY19, this should provide sequential improvement ahead.
  • Encouragingly, tenants’ sales rose 4.9% y-o-y awhile footfall grew 2% y-o-y.
  • Management also highlighted its intention to deploy its 100k sq ft of unutilised GFA at Wisma Atria. More concrete plans will be released over the next six months, pending discussions with the relevant authorities. This would provide further upside in the medium-to-longer term.
  • Other positives from the quarter came from the uplift in actual occupancy for Myer Centre Adelaide by 5.5 ppt q-o-q to 89.9%.

Overhang on Malaysia leases lifted

  • As a recap, we believe the new conditional master tenancy agreements with Starhill Global REIT’s sponsor for its two Malaysia properties (Starhill Gallery and Lot 10) not only lifts the overhang surrounding Starhill Global REIT (assuming unitholders’ approval is obtained), but will also provide strong earnings visibility given the long lease tenures and built-in rent step-ups.
  • While Starhill Global REIT has to bear the cost of an AEI for Starhill Gallery (~MYR175m capex) and also provide a rental rebate of MYR26m per annum during the asset enhancement works period, Starhill Global REIT aims to mitigate this by taking part of its management fees in units.
  • Overall, we are largely positive on this development. Factoring this in our forecasts and lowering our cost of equity assumption from 8.0% to 7.5%, our fair value is lifted from S$0.75 to S$0.80.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-29
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