StarHill Global – OCBC

Second asset enhancement this year

Facelift for Starhill Gallery. Starhill Global REIT recently announced the asset redevelopment of another of its properties, Starhill Gallery in Kuala Lumpur, on the back of its Singapore Wisma Atria’s frontage enhancement made known on 28 Feb. Expected to complete by 2Q11, the asset redevelopment will create an additional NLA of approximately 8,100 sq ft. The rejuvenated Starhill Gallery will offer increased visibility of store fronts and an enhanced range of luxury merchandise, in particular the watch and jewelry brands. The new façade will give Starhill Gallery an iconic presence on Bintang Walk, emerging as a fresh and distinctive luxury shopping destination for high-end shoppers. The Starhill Gallery asset redevelopment is expected to incur a CAPEX of S$10.4m and generate an additional NPI of approximately S$0.7m per annum, representing a ROI of 6.7%. The cost of the asset redevelopment works will be funded from the remaining proceeds of the rights issue by Starhill Global REIT completed in 2009 and/or working capital.

Lease terms. The additional NLA will be leased to Katagreen Development Sdn Bhd, the current master tenant of Starhill Gallery and an indirect wholly-owned subsidiary of Starhill’s sponsor, YTL Corporation Berhad, under a new master tenancy agreement. The new master tenancy agreement will be for a period that is coterminous with the existing master tenancy agreement. The initial term of the new master tenancy agreement will be for the period ending 27 June 2013 with an automatic renewal for a second three year term. Katagreen has an option to extend the tenancy for a third three-year term upon the expiry of the second term. There is also an increase of approximately 7% in the master lease rent at the end of each of the first two terms, providing stability and growth in rental income to Starhill Global REIT. As with the existing master tenancy agreement, Katagreen’s payment obligations under the new master tenancy agreement will be guaranteed by YTL.

Valuation still compelling. With compressing capitalization rates, we understand that it is increasingly more difficult to acquire prime malls at attractive prices. We thus view Starhill’s asset enhancements initiatives positively. According to our estimates, Starhill’s existing NPI yield in FY10 was approximately 4.9%. With a ROI of 6.7%, this makes the Starhill Gallery redevelopment work yield-accretive. Starhill is currently trading at a PBR of 0.67x, which is lower than its historical PBR of 0.73x since listing. We continue to like Starhill’s prime assets positioning, strong sponsor and sound financials. Reiterate BUY with an increased fair value of S$0.70 (Prev: S$0.69).