StarHill Gbl – OCBC

2Q10 in line; valuations still compelling

2Q10 in line. Starhill Global REIT reported 2Q10 revenue of S$37.2m, up 11.4% YoY but down a marginal 1.1% QoQ. Revenue was boosted by the acquisition of David Jones Building in Perth, Australia on 20 Jan 2010. This was partially offset by lower revenue from the office component of Starhill’s Singapore assets. Net property income of S$28.8m was up 6.9% YoY but down 1% QoQ. Starhill declared a 2Q10 DPU of 0.91 S cents, down 52.1% YoY (because of an enlarged unit base post-rights issue) and down 4.2% QoQ. Starhill acquired Malaysian assets Starhill Gallery and Lot 10, on 28 Jun, and made its first distribution payment on the convertible preferred units issued in relation to the acquisitions. The results were in line, with revenue and NPI within 3% of our estimates. DPU was just 3% higher than our 0.88 S cents estimate.

Portfolio performance steady. Office and retail occupancy at Ngee Ann City (NAC) was steady at 95.6% and 100% respectively, flat compared to 31 Mar. Wisma Atria (WA)’s retail occupancy declined 80 basis points from 31 Mar and 150 bps from 31 Dec to 98.5%. WA’s office occupancy also declined to 81.4%, down 60 bps from three months ago but up 390 bps compared to six months ago. Elsewhere, occupancies were stable at 100% for Starhill’s China and Australia assets. The Japan assets, meanwhile, achieved an impressive 700 bps increase in occupancy from 31 Mar to 95.6%; this as Starhill brought in three new tenants over 2Q10. Starhill is leveraged at 30.8% debt-to-assets as of 30 Jun; it has already secured sufficient financing to address the S$570m in debt maturing later this year.

Valuation. We have adjusted our expense assumptions marginally with FY10-11 DPU up 0.5% and 1.1% respectively to 3.84 S cents and 3.96 S cents. Starhill is up 8.3% since our initiation on 02 Jul. Nevertheless, we continue to find valuations compelling at a significant 35% discount to book value. We believe this discount is unjustified when considering Starhill’s high-quality assets, healthy balance sheet and its strong sponsor. Our DDM-derived fair value estimate of S$0.65 (6.7% discount rate, 0.5% terminal growth rate) is intact; this is equivalent to a fairly reasonable (in our opinion) 0.72x priceto-book. With an estimated total return of 16.7%, we maintain our BUY rating on Starhill. Key risks to our view include macroeconomic headwinds, increasing competition in the retail space, foreign exchange risk and changing regulatory and taxation regimes.