Starhill Global’s KL mall to get RM25m makeover

It will create more net lettable area and boost income

STARHILL Gallery – a mall that is part of Starhill Global Reit’s portfolio – will undergo a RM25 million (S$10.4 million) makeover that will create about 8,100 square feet in additional net lettable area.

YTL Starhill Global, the Reit’s manager, said yesterday that the asset redevelopment for the mall in Kuala Lumpur will translate to an additional net property income of about RM1.7 million per annum.

This increase in NPI represents a return-on-investment of about 7 per cent, the Reit manager added.

The works should be completed by the second quarter of this year, with the Reit manager hoping to make store fronts more visible and increase the sale of luxury products.

The renovation cost will be funded from the remaining proceeds of the rights issue by Starhill Global Reit that was completed in 2009, as well as working capital.

Two years ago, the Reit raised $337.3 million through a rights issue – joining the rest of its Reit peers in making a cash call during the financial crisis.

The additional net lettable area will be leased to Katagreen Development, which is the current master tenant of Starhill Gallery and an indirect wholly owned subsidiary of YTL Corporation Bhd, under a new master tenancy agreement.

The initial term of the new agreement will run till June 27, 2013, with an automatic renewal for a second term of three years. The new lease runs concurrently with an existing master lease tenancy agreement, the Reit manager said.

Terms and conditions under both master leases work in an increase of about 7 per cent in the master lease rent at the end of each of the first two terms.

Starhill Global Reit is held by a bankruptcy-remote special purpose vehicle (SPV), Ara Bintang Berhad (ABS SPV).

Such SPVs have operations restricted to the buying and financing of specific assets, and have their assets protected from debt obligations if the parent firm goes bankrupt.

ABS SPV and Katagreen have each a put and a call option respectively to extend the tenancy for a third three-year term when the second term expires.

Shares of Starhill Global Reit gained half a cent, or 0.8 per cent, to finish at 63 cents yesterday.

• The key point in The Edge’s story on Starhill Global is its high dependence on master leases, which essentially means there is little direct benefit from asset enhancement initiatives to be undertaken.

• Starhill’s 4 key assets are: 27% of Ngee Ann City (NAC; and accounting for 31% of group Net Property Income), Starhill Gallery, Lot 10 (two retail malls in Malaysia acquired from YTL in 2010 / 21% of NPI) and 74% of Wisma Atria (27%).

• Only the last does not have a master lease, and the one that is undergoing refurbishment presently at a cost of $30 mln.

• Take NAC: while Toshin of Japan’s current lease may run out in 2013, it has the option to renew for another 12 years. And why should it it not renew, given the popularity of the Takashiyama store.

• Starhill also has assets in China (9% of NPI), Australia (8%) and Japan (4%)

• In the retail reit sector, we maintain our preference for CapitaMall Trust ($1.88 on Friday, unch) and Fraser Centrepoint Trust ($1.48, up 2), even though Starhill offers higher yield of 6.3%, and the lower price-to-book of 0.7x. Corresponding numbers for CMT and FCT are 4.9% / 1.23x and 5.3% and 1.23x respectively.

Positive on Wisma’s facelift but Japan Earthquake created a dent

Facelift for Wisma Atria. Starhill Global REIT announced its plan to embark on asset redevelopment of Wisma Atria to boost the mall’s positioning along Singapore’s Orchard Road. The first phase of the redevelopment will commence in 1Q11 and is expected to complete by 3Q12. The asset redevelopment will unveil an ultra sleek frontage for Wisma Atria, highlighted by double-storey storefronts designed to showcase the latest flagship stores of international retailers. There will be full width steps spanning the facade of Wisma Atria, which will improve accessibility and also provide a permanent flood control measure, doing away with mechanical flood barriers. In addition, there are strategically located ramps and walkways leading to the new shop fronts from the surrounding malls and the nearby Orchard Road MRT station. Phase one of Wisma Atria’s asset redevelopment is expected to incur capex of about S$31m and generate an additional net property income of approximately S$2.5m per annum when stabilized, representing a ROI of approximately 8.0%. The cost of the asset redevelopment works will be funded from the proceeds of the rights issue completed in 2009 and/or working capital. We view this positively, in terms of both higher occupancy and rental rates following the enhancements in 2012.

Impact of Japan earthquake. Starhill has seven malls located in central Tokyo, which contributed 4.6% of total gross revenue and 6.6% of portfolio value as at 31 Dec 2010. So far, Starhill has announced that there is no known damage to the malls based on preliminary reports by its property managers. Nonetheless, we expect retail sales in Japan to be impacted, on the back of electricity rationing in Tokyo which will affect business operations in the near term, as well as an anticipated dent in tourist shoppers in the medium term following Japan’s nuclear fiasco and the risk of radioactivity exposure. We thus revise our FY11/FY12 gross revenue estimates for Japan properties down by 5% to adjust for declining sales and rental income. Our sensitivity analysis also shows that a 5% drop in the rental income of Starhill’s Japan assets will decrease its fair value by 0.4 S-cents.

Valuation still compelling. We noted that Starhill’s assets in Singapore, Malaysia, Australia and China still constituted the majority portion (93.4%) of its portfolio. Starhill is currently trading at a PBR of 0.66x, which is lower than its historical PBR of 0.73x since listing. Notwithstanding that the Japan crisis has bitten into Starhill’s earnings, we still believe in its prime assets positioning, strong sponsor and sound financials. Maintain BUY with a decreased fair value of S$0.69 (Price upside 12.2%)

Starhill Global Reit enhancing Wisma Atria, no surprise

Starhill Global Reit has proposed to embark on some asset enhancement plans for Wisma Atria. The exercise will involve enhancing the mall facade, featuring double-storey storefronts on the second and third storey to showcase the latest flagship stores of international retailers. Pedestrian footpath spanning the facade of Wisma Atria will be widened. Strategically located ramps and walkways leading to the new shop fronts will also be included to improve accessibility from the surrounding malls and the Orchard Road MRT station. To minimize disruption to Wisma’s operation, the AEI will be carried in phases over 1Q/2011 to 3Q/2012. Estimated capex of $31m will be funded internally and yield a ROI of 8.0% or $2.5m additional NPI. Minimal impact on gearing of c. 31% post AEI works.

While the impact is yield accretive, it is likely to be felt in the medium term when the enhancement works are completed. We see this move to tap low hanging fruits from its existing portfolio as positive as it allows them to boost the mall’s visibility along Orchard Road and intensify shoppers’ experience. We have previously assumed a larger scaled AEI plan in our numbers and have now adjusted our estimates to reflect the updated AEI plans unveiled by the manager. FY11 and FY12 DPU estimates of 4.28cts and 4.46cts respectively have been lowered marginally to account for the vacancy of 3% during the AEI period. We expect the impact of additional income to be felt post FY13, upon completion and stabilization of the AEI.

Maintain buy with a slightly lower TP of $0.73

Wisma Atria gets a facelift to draw crowds

COMPETITION has been hotting up at Orchard Road as new malls spring up and older ones get facelifts.

Amid this, Wisma Atria, whose blue facade has been a key feature on the shopping belt, will see a crystal-line frontage with double-storey store fronts as part of its redevelopment.

The first phase of the redevelopment will start this quarter and is slated for completion by the third quarter of next year, according to Starhill Global Real Estate Investment Trust, the Singapore-based Reit which has interests in a portfolio of 13 properties, including Wisma Atria. Its portfolio is valued at about $2.7 billion.

Phase one of the asset redevelopment is expected to incur capital expenditure of about $31 million and ‘generate an additional net property income of approximately $2.5 million per annum when stabilised, representing a return on investment of approximately 8 per cent’. The cost of the works will be funded from the proceeds of a rights issue completed in 2009 and working capital.

The double-storey frontage, to be designed by DP Architects, is primed to showcase the latest flagship stores of international retailers.

Ramps and walkways leading to the new shop fronts will also be built to draw in pedestrians from surrounding malls and the Orchard Road MRT station.

Another key feature is the full-width steps that span the entire 123-metre long facade of the mall. This is to improve accessibility and provide a permanent flood control measure, hence replacing the current mechanical flood barriers.

Ho Sing, CEO of YTL Starhill Global, the manager of the Reit, said: ‘The redevelopment of Wisma Atria is part of our continuous effort to enhance our retail assets, in line with the growing retail environment in Orchard Road.’ He added that the the redevelopment will be implemented with minimal disruption.