Starhill Global REIT - DBS Research 2021-08-04: Time To Kill Two Birds With One Stone

STARHILL GLOBAL REIT (SGX:P40U)

Starhill Global REIT - Time To Kill Two Birds With One Stone

Full-year FY20/21 DPU beat estimates by 8.5% led by lower rental waivers and a strong AUD.
Wisma Atria well placed to capture rental upside with the opening of new anchor tenants, AEI progression, and 1/3 of leases up for renewal in the coming FY.
Valuation flat y-o-y; 5.8% valuation dip at Wisma Atria, neutralised by valuation gains from Australia.

Starhill Global REIT (SGX:P40U) reported full-year revenue of S$181.3m (+0.3% y-o-y).
NPI rose 2.0% y-o-y to S$134.7m. This was partly due to lower rental waivers granted for the period and appreciation of the AUD.
Rental assistance aggregated to ~S$9.5m in FY20/21, including allowance for arrears for Australian assets.
Distributable income for 2H FY20/21 of S$44.9m was 67.3% higher y-o-y. This includes the last of income retained from FY19/20, amounting to S$4.6m.
Starhill Global REIT will be retaining S$3.6m of DI for the period should the need of rental assistance arise again in FY21/22 or towards ongoing AEI works at Wisma Atria.

For FY20/21, tenant sales and shopper traffic were at 71% and 50% of normalised levels, respectively.
Wisma Atria is currently undergoing a strategic repositioning and is in the midst of interior upgrading works. The AEI has caused minimal operational disruptions and early stages (refurbishment of selected washroom/lift lobby area) of the project have been completed.
During the course of the period, new tenants were onboarded at Wisma Atria and familiar names amongst the local crowds. This includes Haidilao Hot Pot, Mr Coconut, and The Providore.
There continues to be strong leasing interest from retailers within the medical cosmetic space as well as luxury space.
GTO rents: Fixed rents have shifted to 5:95 and are within a comfortable range going forward. Full-year rental reversion is at -11% for retail and -6% for office, with a reversal in 4Q20.
Approximately one-third of leases (by GRI) at the mall will be due for renewal in the coming financial year, coinciding with the launch of key anchor tenants (e.g. Haidilao) and an upgraded interior. We think that Starhill Global REIT is well positioned to capture higher reversionary rents in the coming year while concurrently refreshing the tenant mix, killing two birds with one stone.
Master anchor leases made up ~52% of gross rents for FY20/21, with only 13.5% of retail leases expiring in FY21/22.

Revenue contribution from Australia improved on the back of a stronger AUD.
Rental remains well anchored through master leases, which accounted for ~60% of gross rents from the Australia portfolio
Myer Centre Adelaide will finally see full occupancy on the fourth level with a design and animation school. The additional space will accommodate the expansion of an existing tenant, with higher committed occupancy of 93.8%. Level 5 will undergo slight AEI works to increase marketability.
Lot 10 saw the opening of Jonetz by Don Don Donki, a flagship store in Kuala Lumper. The Starhill continues to be on track for completion by Dec’21.

Office retail cap rates used were in the range of 4.7- 4.75%, whereas Orchard office was valued at a 3.7% cap.
Wisma Atria’s valuation dipped 5.8% y-o-y, while Ngee Ann City’s y-o-y valuation came in flat, due to lower passing rents within the Orchard precinct.
The valuation losses were partly supported by valuation gains from Australia (+11.2%) and Malaysia (8.5%) due to a stronger AUD and MYR.

The recent changes in indexation rules for the EPRA NAREIT Developed Asia Index puts Starhill Global REIT in the front seat for possible inclusion in the upcoming Sep 2021 review in our view.
Based on the latest market cap of the Index, we believe that Starhill Global REIT remains a prime candidate, having met the requirements (i.e., liquidity, free-float, developed market exposure).
We believe this will be a catalyst for Starhill Global REIT to continue to see inflows, driving a re-rating for the stock.
See
BUY recommendation maintained for Starhill Global REIT with an unchanged target price of S$0.75 as we roll over valuations into FY22.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-08-04

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