Starhill Reit’s rent review application dismissed

It’ll appeal the High Court ruling, file a stay of execution

THE High Court has dismissed the application from Starhill Global Reit, which had asked the court to declare as non-operable the rent review mechanism in its lease agreement with Toshin Development Singapore.

YTL Starhill Global Reit Management, the Reit manager, said yesterday that it would be filing an appeal against the decision and a stay of the High Court’s orders.

Toshin is the subsidiary of Takashimaya and leases over 225,000 square feet of retail space in Ngee Ann City as master tenant and sub-leases to luxury brands such as Chanel, Louis Vuitton, Burberry and Shanghai Tang.

Inked in 2008, the lease agreement between Starhill Reit and Toshin will expire in 2013 and rental renewals are due every three years. The next rental term of two years starting on June 8, 2011 was up for review.

Under the rent review mechanism, both parties will agree on the new rental rate, which has a cap of not more than 25 per cent from the current rates.

If no consensus is reached, both parties would jointly nominate three valuers. Should there be no agreement on the nomination, they could jointly request for the three valuers to be nominated by the president of Singapore Institute of Surveyors and Valuers.

But Starhill claims, in its application to the court, that this rent review mechanism is no longer operable and requests that the High Court proceed to determine the prevailing market rent of the Toshin lease.

Toshin, on the other hand, takes the view that this rent review mechanism is still operable.

Since the new rental rate has not been determined before the start of the new rental term, the current rate will continue to apply until the new rent has been determined.

The rental rate shall be adjusted retrospectively from the start of the new rental term as soon as the new rent has been determined and any accumulated arrears of rent, if any, shall be paid by Toshin.

Starhill’s stake in Ngee Ann City represents 27.23 per cent of the total share value of strata lots in Ngee Ann City.

Starhill rises after positive reports by analysts

STARHILL Global Reit units rose yesterday after Standard Chartered initiated coverage of the trust with an ‘outperform’ rating and a target price of 81 cents.

Investment Research report which identified Starhill as the bank’s preferred pick in the retail segment.

Starhill, which owns stakes in the Ngee Ann City and Wisma Atria shopping malls along Orchard Road, ended the day one cent, or 1.7 per cent, up at 60 cents.

Stanchart said in a report dated Aug 22 that Starhill is a cheap proxy to luxury retail in Singapore.

Analysts Meenal Kumar and Regina Lim noted that the trust is the cheapest Reit in Singapore with exposure to Singapore retail assets. The stock was trading at around 0.7 times adjusted net asset value.

The analysts expect a compound annual growth rate of 5.7 per cent for Starhill’s distribution per unit over the 2011-2013 financial years, as they expect the company’s Singapore assets to deliver a strong performance.

‘We believe central area retail rents will outperform suburban retail rents because of the large amount of suburban retail supply in the next three to five years,’ they said in their report. ‘We now prefer central retail landlords to suburban retail landlords and believe Starhill Global Reit is one of the best ways to play this theme.’

OCBC Investment Research likewise said in a new report yesterday that it prefers Orchard Road retail exposure over suburban malls.

The supply of retail space in the Orchard Road vicinity is expected to ease in the 2012 financial year, the firm added.

OCBC has a ‘buy’ call on Starhill with a target price of 70 cents.

Starhill Global Reit, which owns commercial assets in Singapore, Malaysia, Australia, China and Japan, is sponsored by Malaysia-listed YTL Corporation.

A brightening star

• In line with expectation; 1H DPU accounts for 49% of our forecast

• Rental reversion and stronger portfolio performance are expected to offset the vacuum for Wisma Atria AEI

• Maintain BUY, S$0.73

In line with expectation. Gross revenues and NPI were higher by 18.9% yoy and 23.4% yoy to S$44.2m and S$35.6m respectively. This was mainly attributed to new contribution from its enlarged portfolio offsetting lower earnings from negative rental reversions and weaker Japanese assets’ performances. On a q-o-q basis, gross revenue and NPI dipped marginal by 3.5% and 4.0% respectively. Distributable income (net CPPU holders) was S$20.2m (+14.3% yoy, -2.8% qoq), which translated to a DPU of 1.04 Scts. 1H forms c.49% of our full year estimates.

Operations on track. Pre-commitment of the additional prime space at the 2nd and 3rd level at Wisma Atria is well ahead of the 2Q12 completion date, with almost 75% taken up by existing tenants and new-to-market retailers at higher rents (in excess of 50%) and the remaining 25% currently under negotiation. Meanwhile, office demand remained healthy with office occupancy at Wisma Atria and Ngee Ann City strengthening to 92% and 96.6% respectively, and monthly signing rents at S$9.0 – S$10.0 psf per mth, up from S$8.5 – 9.0 psf a quarter. New tenants in the 1H include Chanel, H&M & Sea Folly. Going forward, additional rental revenue from the completed AEI works at Starhill Gallery, improving office occupancies and the upward rental reversion of David Jones lease in August should offset the expected erosion in retail revenue of Wisma Atria as the AEI works intensify towards 4Q11/1Q12.

Maintain BUY, TP S$0.73. The stock offers FY11/12F yields of 6.6-6.9%, translating to a total return of 19%. Gearing remains healthy at 30.9% with no major refinancing needs till 2013. DPU for FY11/12 was nudged down marginally to account for the lower occupancies at Wisma Atria retail space. Re-rating catalyst will come from potential new acquisitions that are currently not factored in our numbers.

Meeting the mark

• In line; maintain Outperform. 2Q11 DPU of 1.04cts (+14% yoy) meets our estimate and consensus, at 25% of our full-year number. 1H11 DPU forms 50% of our forecast, Positives were improving occupancy and achieved rents for its office portfolio though rental reversions were expectedly negative. Starhill has secured 75% pre-commitments with good reversions for space under AEI in Wisma Atria and could beat its ROI target of 8%. Legal proceedings against Toshin are still ongoing. We continue to like the stability afforded by its master and long leases, low asset leverage and well-located assets. Downside should be limited by current valuations

of 0.7x P/BV and forward yields of 6.5%, the highest for retail REITs while re-rating catalysts could come from improving office occupancy, positive rental reviews for Toshin leases, higher-than-expected returns from AEI and accretive acquisitions. No change to our DPU estimates or DDM target price of S$0.74 (discount rate 8.4%).

• Improving occupancy. Continued negative rental reversions for offices were mitigated by improving occupancy at both Wisma Atria and Ngee Ann City, where occupancy improved qoq by 1.7% pts and 1.2% pts respectively. Demand for office space by fashion and other retailers remained healthy, with leases signed at S$9-10.50psf. With rents picking up, management expects negative rental reversions to stabilise by 3Q-4Q12.

• AEI at Wisma Atria well-received. Starhill has secured 75% pre-commitments, with good reversions for space under AEI in Wisma and appears on track to beat its ROI target of 8%. Its AEI has been well-received and aided in rental negotiations and reversions for nearby leases. The worst-hit quarters should be 4Q11 and 1Q12, though work disruptions could be minimised by a 2-phase TOP and the relocation of tenants to temporary holding units. With the bottoming out of prime retail rentals, Starhill appears poised to capture rental upside on completion of the AEI in 3Q12.

• Rent reviews for 2011 underway. Legal proceedings between Starhill and Toshin over a rental review mechanism for the Toshin lease are ongoing. Rental step-up of about 6.1% on its David Jones long lease will kick in in Aug 11.

Starhill Global Reit’s Q2 DPU increases 14.3%

STARHILL Global Real Estate Investment Trust said yesterday that its second-quarter distribution per unit climbed 14.3 per cent, buoyed by its Malaysian and Australian purchases. The DPU of 1.04 cents compares with 0.91 cents a year ago.

Q2 income available for distribution rose 26.8 per cent year on year to $22.8 million, while net property income was up 23.4 per cent year on year at $35.6 million.

Gross revenue was up 18.9 per cent at $44.24 million.

‘Our acquisitions of Starhill Gallery and Lot 10 in Kuala Lumpur, Malaysia and David Jones Building in Perth, Australia last year have been key contributors to the growth,’ said Francis Yeoh, executive chairman of YTL Starhill Global, which manages the Reit.

Starhill Global Reit’s Singapore portfolio, comprising interests in Wisma Atria and Ngee Ann City on Orchard Road, contributed 62 per cent, or $27.5 million of total revenue.

Starhill Global Reit said that while the take-up rate for office space in Singapore has been healthy, overall rental rates have declined as new and renewed office leases were secured at rental rates which are below the peak levels achieved in 2007.

However, its Malaysia portfolio contributed 17.3 per cent, or $7.7 million, of Q2 revenue. The David Jones Building in Perth contributed 8.3 per cent or $3.7 million to total revenue.

Starhill Global Reit said that the global economic growth will continue to be led by Asia for the rest of this year. As the ongoing debt crisis in Europe and the United States continue to weigh down the economic growth of these advanced economies, IMF projects that Asia’s gross domestic product will expand by 8.4 per cent this year.

Against this backdrop, it is proceeding with the redevelopment of the Wisma Atria property, which is expected to be completed in the third quarter next year.

Its retail properties in Malaysia and Australia have master leases or long-term leases with built-in step-up rents.

‘These will contribute to the stability and sustainability of the income while ensuring organic growth for Starhill Global Reit,’ it said.

Starhill Global Reit closed trading yesterday at 65.5 cents, up half a cent.