Store of opportunities

• 0.7x P/NAV ratio is attractive vs commercial peers

• Multi-prong growth: organic expansion, asset enhancement exercises and acquisitions

• Maintain BUY and S$0.73 TP

More value in store. We are retaining our Buy call for SGReit following updates from management and the HK NDR. SGReit’s unique value proposition lies in its prime retail offering and niche office exposure along the Orchard Rd belt. FY11-12F yields of 6.9%-7.3% imply attractive 280bps spread over the risk free rate, backed by the top class commercial assets in town and a reputable sponsor. There is good earnings visibility going forward, led by organic growth potential and proactive asset enhancements. At current valuations of 0.7x P/book NAV vs its commercial peers’ 0.8–1.3x, valuations are attractive. At S$0.73 target price, the stock offers 23% total return.

Stronger organic growth. Earnings growth will be driven by (i) positive rental renewals from two master tenants, Toshin and David Jones, which contribute a quarter of its portfolio revenue. Toshin’s lease reversions are capped at 25% above preceding levels, but we conservatively imputed only 10% despite 20% adjustment in the last cycle. For David Jones, we expect 6%-8% rental hike; (ii) robust outlook for Singapore’s commercial industries along with stronger tourist arrivals, which should have a knock on effect on portfolio performance; and (iii) proactive asset management exercises e.g. reviewing tenancy mix at Wisma Atria, to enhance shoppers’ experience and footfall.

Optimising yields, growing portfolio. SGReit will spend c.S$41m to create more prime space at Wisma Atria and Starhill Gallery, and is targeting 7-8% IRR within the next few quarters. Despite the small impact, we are encouraged by its efforts to create more value for unitholders. Gearing remains low at 30% with no refinancing requirements this year, placing it in good position to make acquisitions.

Attractive yields for well-heeled retail malls

• Attractive yields for well-heeled retail malls; initiate with Outperform. Starhill’s portfolio is dominated by high-end retail properties located in prime shopping districts in Singapore, Malaysia, China, Australia and Japan. We use DDM (discount rate 8.4%) to value Starhill and arrive at a target price of S$0.74. We believe its well located assets, master leases and low asset leverage offer income stability. FY11 DPU yield of 6.7% is also the highest among retail REITs under our coverage. We see catalysts from higher rental revisions, asset-enhancement initiatives and accretive acquisitions.

• Master leases for income stability. While exposure to discretionary spending (in high-end retail malls) typically increases volatility, we expect master and long leases, which anchor about 44% of our FY11 revenue forecast, to mitigate these volatilities. Master and long leases on its overseas assets, likewise provide income stability as the REIT ventures overseas for growth.

• Growth catalysts. Its Toshin and David Jones master leases will be up for reviews in FY11. With both properties substantially under-rented, we see room for upward rental revisions. Management has also announced asset-enhancement plans for Wisma Atria, which should drive rental growth on completion. Meanwhile, low asset leverage at 30% leaves room for acquisitions without the need for substantial equity fund-raising.

Boost from acquisitions

At a Glance

• DPU of 1.07cts in line with expectations.

• Positive master lease rental reversion and asset enhancement works to underpin growth

• Maintain Buy with S$0.73 TP

Comment on Results

No surprises, although DPU highest since listing. Starhill Global REIT (SGREIT) reported a strong 21.9% y-o-y growth in topline to S$45.8m and 27.2% y-o-y growth in NPI to S$37.1m boosted by the higher revenue from Chengdu property and expansion of its portfolio – full quarter contributions from David Jones Building and Malaysia properties acquired last year. However, gross revenue and NPI improved by a marginal 0.5% and 0.9% respectively on sequential basis, as the SG office portfolio continued to experience negative rental reversion coupled with poorer performance from its Japanese portfolio (-13.0% qoq). After retaining S$0.8m, distributable income of S$20.8m (net of S$2.4m to CPU holders) translates to a DPU of 1.07 Scts.

Moving occupancy up. Chengdu property and David Jones Building are fully occupied. Take-up at Wisma Atria rose 1.7 ppt qoq to 94.5%, while Ngee Ann stabilised at 98.4% (-0.3 ppt qoq). Meanwhile, retail sales at Wisma Atria increased by 0.4% YTD backed by 6% higher footfalls to 6.8m. Going forward, we expect stronger performance in 2H11 from the completion of asset enhancements at Starhill Gallery in 2Q and the positive rental renewals from Toshin and David Jones master leases that are up for renewal in June and Aug 2011.

Healthy financials. Gearing remains healthy at 30.2%, well below the optimum level of 45%. With no major refinancing needs till 2013, the group is in good financial position to make further acquisitions.

Recommendation

We maintain our BUY call, TP of $0.73. The improving office outlook and stabilised retail market should lead to further improvement in its SG portfolio that represents 60% of its total revenue. We see relative value in SGREIT with the stock trading at 0.7x P/BV and offering forward FY11-12 yields of c6.9-7.3%.

Starhill Global’s Q1 DPU rises to record 1.07 cents

STARHILL Global Reit’s Australian and Malaysian buys last year helped buoy first-quarter income distribution to unitholders.

Income available for distribution grew 27.9 per cent to $24 million. Of this, $20.8 million is for distribution to unitholders, a rise of 13.1 per cent. Another $2.4 million goes to convertible preferred unit (CPU) holders.

Distribution per unit (DPU) to unitholders was a record 1.07 cents, up 12.6 per cent from 0.95 cents last year.

DPU to CPU holders was 1.36 cents.

In January 2010, Starhill Global acquired David Jones Building in Perth. It then added Starhill Gallery and Lot 10 in Kuala Lumpur to its retail portfolio in June 2010.

Starhill Global’s gross revenue and net property income for its first quarter increased 21.9 per cent and 27.2 per cent to $45.8 million and $37.1 million, respectively.

The group said the higher revenue from its properties in Australia, Malaysia and China helped offset dips from Singapore and Japan.

Revenue from its Singapore properties still made up a significant proportion of its portfolio at 60 per cent or $27.6 million.

However, net property income from Wisma Atria and Ngee Ann City edged down 2.4 per cent to $22 million as new and renewed office leases were secured at rates below 2007 peak levels.

In contrast, Starhill Global’s Renhe Spring Zongbei property in Chengdu, China recorded a 27.9 per cent rise in net property income year on year to $3.2 million.

David Jones’ and Starhill Global’s Malaysian malls contributed $2.9 million and $7.6 million, respectively, to net property income.

The Reit’s gearing level was ‘prudent’ at 30.2 per cent, said YTL Starhill Global, the Reit’s manager. It has outstanding debts of $804.4 million with a weighted debt maturity profile of about 2.9 years.

Starhill Global ended half a cent up at 63 cents yesterday.

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).