StarHill Global – OCBC

4QDPU Highest since IPO; More Rental Upside ahead

4QDPU of 1.04 S-cents. Starhill Global REIT reported 4Q10 gross revenue of S$45.6m, up 33% YoY and 0.9% QoQ. Distributed income rose 7.6% YoY and 4% QoQ to S$20.2m. For FY10, gross revenue jumped 23.1% to S$165.7m, which was in line with our expectations. The revenue increase was attributed to the contribution from Starhill Gallery and Lot 10 in Malaysia, and David Jones Building in Australia, which were acquired in 2010. Distributed income was also 3% higher at S$75.7m. 4Q10 DPU is 1.04 S-cents – the highest ever achieved in a quarter since Starhill’s IPO in Sep 2005. This was 7.2% higher than the 0.97 S-cents paid out in 4Q09. On an annualized basis, the latest distribution represents a yield of 6.42%1 .

Rentals act in its favor. As at 31 Dec 2010, Starhill’s Singapore retail and office occupancy was 99.1% and 92.5% respectively. We are also witnessing decelerating declines in its office rental income, signaling that negative rental reversion for Starhill’s office portfolio is likely to bottom out in 2011. In addition, about 87% of its gross office rents will expire by 2013. We believe that Starhill stands to gain from the prime office rental recovery, which just begun experiencing doubledigits growth rates (12.2%) on a quarterly basis in 4Q10 (according to CBRE). On the retail side, we think that Prime Orchard rents are also likely to pick up pace soon, due to the following reasons: (1) Prime Orchard rents have declined and narrowed significantly from suburban rents over the past year. It is only logical to go upwards, since suburban rents sets the floor to prime Orchard rental rates. (2) Orchard retail supply has stabilized; we do not expect mega, large-scale malls coming up like what we have seen in 2009-2010. (3) Shopper traffic along Orchard road have burgeoned much, correlating to the increase in tourist arrivals to Singapore. This is likely to exert upward pressure on rental rates. In our opinion, Starhill is poised to capitalize on the rental upside ahead, especially given that one of its major tenants at Ngee Ann City, Toshin Development (constitutes 20% of Starhill’s gross rental income) is up for rental review (with upwards only provision) in Jun 2011.

Valuation still Compelling. Starhill is currently trading at a PBR of 0.71x, which is lower than its historical PBR of 0.73x since listing. We still think that this discount is unwarranted, given its prime assets positioning, strong sponsor and sound financials. Rental escalation ahead serves as strong catalyst. Maintain BUY with an increased fair value estimate of S$0.74.