Non-material sale

SGREIT just announced that it has successfully divested the Holon L property in Tokyo at a 6.0% premium over book. Given that this asset is one of the smallest in SGREIT’s portfolio, we view this event as non-material though we speculate that there could be more divestments in the coming months, given that management is committed to reshuffling its portfolio. It plans to focus on a few key markets where its strength lies, which in our view include Singapore, Malaysia and Australia. We maintain our Hold rating with an unchanged DDM-based (discount rate: 8.4%) target price of S$0.80.

What Happened

Starhill Global REIT (SGREIT) just announced that it has successfully divested the Holon L property located in Tokyo for ¥1,026m (c.S$12.8m). The selling price represents a 6.0% premium over book value, translating into a yield of 4.03%. SGREIT’s management revealed that the proceeds from the divestment will be used to repay its yen loans as well as for working capital purposes. As a result, its gearing will drop marginally by 0.3% to 28.7%.

What We Think

In our estimation, Holon is one of the smaller assets that SGREIT owns in Japan, accounting for c.9.3% of the NLA of its Japan’s portfolio and 0.4% of the REIT’s total NLA. In addition, in our estimation, c.S$0.5m of income is lost as a result of this divestment, leading to DPU declines of c.0.2% for FY14 and FY15, respectively. Moreover, as the proceeds from the divestment are used to pay down SGREIT’s yen loans, the impact of the yen’s devaluation on this transaction is minimal. Looking back, this is the second sale of its assets inJapan. We believe that SGREIT’s management is committed to focusing its strength on a few key markets such as Singapore, Malaysia and Australia. As such, there could be more portfolio divestments in the offing, including the mall in Chengdu China.

What You Should Do

Given that the impact of this sale on SGREIT’s earnings is minimal, we keep our Hold rating with an unchanged DDM-based target price of S$0.80.

NDR feedback: Tide slowly turning

• A 100bps/200bps increase in borrowing costs will shave 2%/2.5% off DPU.
  
• A 10% drop in all SGREIT’s forex exposure will see DPU slide by no more than 5%.
  
• Higher occupancy costs for SGREIT tenants are offset by their higher sales efficiency.
  

Key takeaways

Looking positive. We hosted SGREIT for a non-deal roadshow (NDR) in Singapore and Malaysia recently. We came away feeling more positive about its asset quality, defensive lease structures and financial standing. Management said a 100bps/200bps rise in borrowing costs will shave 2%/2.5% off its DPU; a 10% drop in forex exposure (JPY, AUD, CNY, MYR) will see a dip by no more than 5%.

Occupancy cost ratio. On the use of the industry’s de facto standard, occupancy cost ratio (OCR), to gauge mall performance, management cautioned that luxury goods tenants in its prime Orchard Road malls differ from suburban mall tenants in sales efficiency. The higher occupancy costs incurred by the former are offset by higher sales efficiency.

Traffic count. Management also took pains to explain that shopper traffic in prime Orchard Road and suburban malls differ because of the clientele. The shoppers at SGREIT’s malls are mainly tourists whereas suburban malls cater to residents in their vicinity. It added that the lower shopper traffic at Orchard Road malls vs suburban malls do not necessarily translate to lower sales as the former malls have much higher sales efficiency than the latter.

Upcoming lease renewals. In Malaysia, management is eyeing ~6.8% increase in rent when the master tenancy with Katagreen Development for Starhill Gallery and Lot 10 is up for review in 2016. For Australia, it expects rent for the David Jones Building to go up by 6% in Aug 2014.

Maintain HOLD. For now, we maintain our HOLD call with an unchanged DDM-derived TP of SGD0.84 (discount rate of 7.3%, terminal growth rate of 2%).

Still among our top picks

• Strong results from Singapore and Australia
  
• Loan rates substantially hedged or fixed
  
• Poised for further growth
  

Clear growth drivers

We continue to be positive on Starhill Global REIT’s (SGREIT) performance in 2014. SGREIT has recently delivered a strong set of 3Q13 results on the back of strength from its Singapore portfolio and new income stream from Plaza Arcade in Australia. We believe the full potential has yet been unleashed, as SGREIT has continued to make significant progress on its portfolio occupancy and rents over the year. For one, the office segment in Singapore has continued to see positive rental reversions and improved occupancy. Post redevelopment and asset repositioning of Wisma Atria, the property has also seen its rental rates and sale efficiency rise steadily. In Jun, SGREIT secured another 6.7% increase in base rent for the Toshin master lease at Ngee Ann City and a 7.2% rental uplift for its Malaysia assets. This positive momentum is likely to flow through positively into 2014, given that the retail rental market in Singapore is expected to stay positive in the next 6-12 months.

Significant improvement in debt profile

On the capital management front, SGREIT has been consistently maintaining a robust gearing level of ~30.0%. However, noteworthy was SGREIT’s recent drawdown of new unsecured loan facilities to refinance its debts due in 2013. As a result, SGREIT does not have any refinancing needs until Jun 2015, while its unencumbered asset ratio improves to 79.0% from 42.0% previously. As the new loans were also substantially hedged, its fixed/hedged debt ratio also increased to a significant 94.0% from 81.0% in 2Q13. This will limit its exposure to rising interest rates and provide unitholders greater certainty on its cash flows.

Maintain BUY

We continue to like SGREIT for its clear growth drivers, robust financial standing and compelling valuation. We are keeping our forecasts and fair value of S$0.95 intact as the recent developments have panned out according to our expectations. However, we do not rule out new investments/asset enhancements and capital recycling by SGREIT in 2014, which may provide further catalysts for growth. We maintain BUY on SGREIT.

Limited growth expected

Although SGREIT continues to report a stable performance, we believe the upside to this stock is capped as a result of foreign exchange risks and, more importantly, the lack of clear, meaningful growth catalysts.

The 3Q13 results are in line, with DPU accounting for 24% of our full-year forecast and 9M13 DPU at 75%. In view of a lack of meaningful near-term growth catalysts, we maintain our Neutral rating and DDM-based target price (discount rate 8.1%).

Growth constrained by rising expenses and forex

3Q13 revenue grew by 5.5%, mainly due to i) the increase in base rent (+6.7%) for master tenant Toshin at Ngee Ann City Property, stronger performance of Wisma Atria Property post-AEI and the additional contribution from the newly acquired Plaza Arcade. However, this growth was partly affected by rising operating expenses in Singapore, Australia and Japan. Together with weaker JPY and RM, NPI for the quarter grew slower at 4.4%. During the quarter, portfolio occupancy stood at a firm 99.7%.

Strong balance sheet

The balance sheet continues to remain strong with asset leverage reported at 30.6% (vs. average of 34% in the SREIT space), leaving ample debt headroom for future accretive acquisitions or AEIs. During the quarter, SGREIT completed the drawdown of new unsecured loan facilities to finance its matured debts. With this completed, there will be no refinancing requirement until Jun 2015. Currently, with an average debt maturity of 3.4 years, coupled with 94% of total borrowings hedged as fixed rate, SGREIT’s exposure to rate hikes are relatively well sheltered.

Defensive portfolio with limited growth

Although SGREIT’s portfolio continues to be anchored by stable master leases with expected positive rental reversion from its office portfolio, the lack of meaningful growth catalysts limits upsi

Delivering as promised

• 3Q13 DPU up 9.0% YoY
  
• Strong results from Singapore and Australia
  
• No refinancing needs till 2015
  

3Q13 results within view

Starhill Global REIT (SGREIT) reported 3Q13 NPI of S$38.0m and distributable income of S$27.1m, up 4.4% and 9.7% YoY respectively. DPU similarly increased by 9.0% YoY to 1.21 S cents, after retaining S$0.7m (c. 0.03 S cents) in distribution amount. For 9M13, NPI and distributable income were up 7.3% and 17.2% to S$119.0m and S$83.6m respectively. 9M13 DPU came in at 3.77 S cents, translating to a robust growth of 15.6%. This is in line with expectations, given that the DPU has met 76.6%/76.9% of our/consensus FY13F DPU.

Further improvement in operational performance

SGREIT’s Singapore portfolio continued to benefit from Wisma Atria (WA) redevelopment and upward rent reviews at Ngee Ann City (NAC). Over the quarter, WA saw its retail NPI grow by 5.9% YoY as a result of ongoing asset repositioning and higher rentals. Tenant sales at WA, we note, improved 11.8% YoY, giving rise to a better sales efficiency of S$134 psf. At NAC’s retail segment, NPI also registered a strong 14.5% growth following the 6.7% rental uplift from Toshin master lease. In addition, the office segment at Singapore portfolio achieved 11.2% NPI growth on the back of positive rental reversions of 13.7% for leases committed between Oct 2012 and Sep 2013. More notably, Singapore portfolio occupancy reached 100%, up from 99.7% in 2Q. For its overseas properties, Australia portfolio was the key performer, raking up a 25.7% increase in NPI due to incremental income from Plaza Arcade. As a result, this more than offset the lower contributions from the other overseas properties due to unfavourable forex movements and increased competition.

Maintain BUY

On the capital management front, we note that SGREIT has completed the drawdown of new unsecured loan facilities to refinance its debts due in 2013, leaving it with no refinancing needs until Jun 2015. As at 30 Sep, gearing stood largely unchanged at 30.6% (30.3% in 2Q), while the fixed/hedged debt ratio improved to 94.0% from 81.0% seen in 2Q. We continue to like SGREIT for its clear growth drivers, robust financial standing and compelling valuation. Maintain BUY and S$0.95 fair value on SGREIT.