Starhill Global REIT - RHB Invest 2019-04-29: Signs Of DPU Stabilisation; Keep BUY


Starhill Global REIT - Signs Of DPU Stabilisation; Keep BUY

  • Keep BUY on this top sector pick, SGD0.78 Target Price implies 5% upside and 6% FY19F yield.
  • STARHILL GLOBAL REIT (SGX:P40U)’s 3QFY19 (Jun) DPU ticked up y-o-y after 10 consecutive quarters of decline, indicating early signs of stabilisation. We maintain that the worst is likely over, with its Singapore retail portfolio bottoming out and a turnaround expected in the overseas and office assets.
  • Valuations are still attractive – it is trading at 0.8x FY19F P/BV, ie the cheapest among retail/office S-REITs.

SGREIT's 3QFY19 DPU up 0.9% y-o-y, results slightly below estimates

  • Starhill Global REIT's 3Q19 gross revenue and NPI for the quarter rose 0.9%/1.8% y-o-y, mainly due to lower contributions from Wisma retail, slightly higher operating expenses and a weaker AUD. Singapore assets accounted for the bulk (62%) of revenue, followed by Australia (22%), Malaysia (14%), China and Japan (2%).
  • Income tax expense for the quarter fell 38% y-o-y to SGD0.9m, mainly on higher Malaysia withholding taxes in the previous quarter. Starhill Global REIT retained about SGD1m during the quarter for working capital.
  • Overall 3Q/9MFY19 DPU accounted for 23%/72% of our full-year DPU estimates.

Wisma Atria (Wisma retail): improvement in occupancy, shopper traffic and tenant sales.

  • More positive signs emerged in its Singapore retail portfolio, with overall committed occupancy rates increasing 0.5ppt q-o-q to 99.7%. Notably, Wisma retail committed occupancy rate rose 1.4ppt to 99%, albeit at slightly lower rates. This came with a 5% increase in tenant sales and 2% increase in shopper traffic, which is positive.
  • Looking ahead, management plans to tap into an additional GFA of ~115,000sqf, which is available. It is currently in discussions over this with various authorities. With occupancy rates stabilising, the REIT manager also plans to slowly improve the effective rental rates of the mall by ~10% over next few years, with the Thomson East line (opening in 2021) being an added catalyst.

Potential upside from Toshin master lease review.

  • For Ngee Ann City (NAC), the Toshin master leases (c.21.6% of gross rental rates are due for review in June. The review has a rental downside protection clause, with scope for rate increases based on current market rates. We believe there is room for a mid-single digit rental increase from rental reviews, with Orchard Road rental rates trending upwards over the last one year.

New Malaysian master leases provide long-term earnings stability.

  • Starhill Global REIT’s two Malaysian assets, Starhill Gallery (SG) and Lot 10 Property (Lot 10), has current master leases expiring in June. Management recently announced the signing of a new master lease agreement with existing tenant YTL Corp (the REIT’s sponsor), which will have a long tenure of 19.5 years and nine years (including options) for SG and Lot 10.
  • The initial rental income from the Starhill Gallery master lease is similar to the expiring rental rate, with a built-in step-up of 4.75% after every three years. For Lot 10, the initial rental rate will be 5% higher than what it is currently, with a 6% rental step-up after every three years.
  • To better position Starhill Gallery, Starhill Global REIT will also undertake asset enhancement initiatives, which includes the conversion of the top three floors into a hotel as an extension of the adjoining JW Marriott Kuala Lumpur hotel, the revamp of the mall’s entrance and refreshing interior spaces for MYR175m (~SGD 58.1m). Starhill Global REIT will also provide a six months’ rental rebate of MYR26m to the master lessee for the first two years to offset the AEI impact. The REIT manager plans to offset the impact to DPU by taking 57% of management fees in units (currently 100% in cash).

Better performance expected from Australia portfolio.

  • Revenue and NPI for the Australia properties increased 3% y-o-y despite the weaker AUD. The office occupancy rate for Myer Centre Adelaide more than doubled to 74.9% as at 31 Mar, following the commencement of the lease with a digital media solutions provider as the office anchor tenant.
  • Gearing is expected to increase slightly to 36.7% (from 35.5%) with the additional capex incurred for Singapore asset id, it is still well below the maximum threshold of 45%.

Vijay Natarajan RHB Securities Research | 2019-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.780 SAME 0.780