Bright lights, big city

• 2Q13 results in line
  
• Strong reversions for Singapore and Malaysian properties
  
• Expect stronger 2H13; Maintain BUY, TP S$0.94
  

Highlights

Still shining bright in Orchard Road. Starhill Global REIT recorded 2Q13 revenues of S$49m (+6% y-o-y), NPI of S$39m (+5% y-o-y) and distribution income of S$26m (+11% y-o-y).The increase in revenue and NPI were attributable to higher occupancies and reversions for the Singapore properties as well as full-quarter contributions from Plaza Arcade in Australia, which was acquired in 1Q13. The Manager announced 2Q13 DPU of 1.19Scts on an enlarged share base of 2.15bn units (+11%) after YTL Group converted their CPUs into units in early July. The 1H13 DPU of 2.56Scts includes one-off Toshin payout from accumulated rental arrears in 1Q13 of 0.19Scts. 1H13 DPU of 2.56Scts comprises c.53% of our FY13F DPU.

Positive rental reversions across Singapore and Malaysian properties. Starhill announced major rent reviews in Singapore and Malaysia for 2Q13: Toshin renewed its master lease for another 12 years with 6.7% increase in base rent; Starhill Gallery and Lot 10 also saw master tenancy reversions of 7.2%. These reviews were concluded in June, and should contribute to earnings in the coming quarters. Wisma Atria reported rental reversions of c.15% after completion of its AEI works. Around 12% of NLA was reconfigured to house new-to-market brands such as i.t. and Liu.Jo, and going forward, the Manager aims to have 30% of the mall represent tenants that are unique to Wisma.

Our View

Income growth prospects still strong. Going forward, we expect Starhill’s malls in China and Japan to underperform as a result of increasing retail competition in Chengdu and the depreciating Yen. We believe there is good value in the David Jones Building and Plaza Arcade in Australia despite the depreciating AUD, as the two buildings are located next to each other and could benefit from the consolidation of retail space and optimal mix of tenants. Finally, we expect office rents to be stable. Passing rents at Ngee Ann City are c.S$9.50 psf/mth, and some transacted rents have breached the S$10 psf/mth level. With c. 34% and 36% of gross office rentals due to expire at Wisma Atria and Ngee Ann City respectively, there may yet be some upside through positive rental reversions.

Recommendation

Maintain BUY, TP S$0.94. Going forward, we believe that 2H13 will reflect a stronger set of results as reversions from the master leases in Ngee Ann City, Starhill Gallery and Lot 10 begin to contribute on a fullquarter basis. We should also see greater clarity on how the newly fitted out tenants in Wisma Atria are performing. As c.80% of leases in Wisma Atria have a gross turnover (GTO) component, we could see some upside from that aspect in terms of higher tenant sales. We have adjusted our TP slightly to account for a larger share base (from YTL’s CPU conversion) and a higher risk free rate of 2.8% (from 1.8%). Maintain BUY, TP S$0.94.

The Big 1Q13??? Toshin, Japan and YTL

Special Distribution expected in 1Q13. SGREIT will be announcing its 1Q13 results on 26 Apr (aft. market). We think SGREIT is likely to announce a special distribution of 0.2 SG-cts, following the 10% rent increase for the master lease with Toshin at Ngee Ann City (NAC). The net rental arrears from 8 Jun 2011 to 31 Dec 2012 amounted to ~SGD3.8m. We forecast 1Q13 DPU at 1.37 SG-cts and FY13 DPU at 4.88 SG-cts. This represents an 11% YoY growth, boosted by positive rental reversions following Wisma Atria’s AEI (21.5% of gross rent up for renewal in FY13) and acquisition of Plaza Arcade.

Toshin rental dispute resolved. What to expect next? A separate rent review exercise with Toshin is in progress to determine the NAC renewal rent to be paid upon the commencement of the option period of 12 years starting 8 June 2013. The 10% increment from 8 Jun 2011, estimated at SGD14.90 psf/mth, will be used as the base rent for this renewal. Our sensitivity analysis shows that every 50 SG-cts psf/mth increment of the base rent will add another 1 SG-cts to our TP.

How big a drag will Japan be? Following the depreciation of Yen against SGD(down ~9% last quarter), we expect the Japan portfolio to report weaker earnings (down 8%-12% QoQ) this round. SGREIT adopts a natural currency hedge strategy (capital hedge), which maximises the use of local currency denominated borrowings, whenever possible, to match the currency of the asset investment. Occupancy rate is also likely to come under pressure from 92.7% in 4Q12. Nonetheless, Japan portfolio represents only a small fraction of SGREIT’s asset, constituting 4% of FY12 revenue/NPI and FY13 RNAV,

Will YTL convert its CPUs? YTL Corp (sponsor) holds 173m CPUs, as part of the consideration for the acquisition of the Malaysia Properties (Starhill Gallery & Lot 10) in 2010. YTL is being paid up to RM0.1322 per CPU equivalent to a distribution rate of 5.65% per annum. The CPUs are eligible for conversion by the sponsor after 28 Jun 2013 at a conversion price of SGD0.7266. If fully converted, this will bring down Unitholders’ fund/shr to SGD0.86 from SGD0.88, with 238m newly issued units (10.9% dilution post-conv). Compared to FY12 DPU yield of 4.6% vis-à-vis CPU coupon rate of 5.65%, we think SGREIT is likely to benefit from the cost savings in annual CPU payments (SGD9.1-9.3m), if the CPUs are converted in full. Nonetheless, this will be at the expense of free float, with YTL increasing its SGREIT’s deemed interest to 37.09% from 29.38%.

Regardless, Investment thesis is intact. SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. We continue to like SGREIT for the rental upside at Wisma Atria and income stability in Malaysia and Australia. At 5.2% FY13F yield and 1.06x P/B, we reiterate BUY with a DDM-derived TP of SGD1.02.

POISED FOR GROWTH

• Plaza Arcade to contribute from 1Q13
  
• Favourable outcome from rent review
  
• Further room for upside
  

Completion of Plaza Arcade acquisition

Starhill Global REIT (SGREIT) announced that the acquisition of Plaza Arcade in Perth, Australia has been completed last Friday. The purchase consideration of A$48.0m (~S$61.0m) was 40% funded by proceeds from SGREIT’s 2009 rights issue with the balance funded by its revolving credit facilities. This is expected to increase its gearing level marginally from 30.3% to 31.0%, according to our estimates. As a recap, Plaza Arcade is a freehold retail property with an NLA of 25k sqft and enjoys a high occupancy of 97.6%. It is located next to SGREIT’s David Jones Building, which gives the REIT opportunity to gain from synergies through asset enhancement. At an NPI yield of 7.8%, we expect the transaction to be DPU accretive, adding 0.08 S cent to SGREIT’s FY13 DPU.

Enlarged DPU expected in 1Q13

Apart from the maiden contribution by Plaza Arcade, SGREIT is also likely to get a boost in its 1Q13 DPU, due to the distribution of ~S$3.8m accumulated net rental arrears expected to be received from Toshin during the quarter. The arrears arose as a result of the retrospective application of the new rental rate (10% increase in base rent) for the term commencing 8 Jun 2011, of which SGREIT has been awarded following the conclusion of the Toshin rent review process. SGREIT intends to distribute substantially the net arrears in 1Q13, on top of the regular distributable income generated for the quarter. Hence, we expect its 1Q13 DPU to be up-sized.

Maintain BUY

We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. We believe further upside in rent is still possible, given that Orchard Road rental and occupancy rates have been holding up well. In addition, SGREIT may possibly benefit from interest savings following the refinancing of its term loan maturing in Sep. As such, we are positive on SGREIT’s performance going forward. Maintain BUY with an unchanged fair value of S$0.98.

EXPECT EXTRA DPU IN 1Q13

• Favourable rent review outcome
  
• Net rental arrears to be distributed
  
• New rate used as base rent for Jun lease Renewal
  

10% rent increase for Toshin master lease

Starhill Global REIT (SGREIT) announced that the rent review process relating to Toshin master lease at Ngee Ann City has been completed on last Thursday and that it has been awarded a 10.0% increase in base rent. The new rate was based on the average of three market rental valuations undertaken by independent licensed valuers, in accordance with the Court of Appeal’s directions, and will be retrospectively applied for the term commencing 8 Jun 2011.

Impact on SGREIT’s DPU

Toshin is the master tenant occupying all the retail areas except level 5 of Ngee Ann City. For Dec 2012, Toshin lease contributed to 85.3% of the property’s gross rent and 18.8% of SGREIT’s portfolio gross rent. Assuming the accumulated rental arrears owing as a result of the rental increase from 8 Jun 2011 to 31 Dec 2012 were paid in FY12 (after deducting expenses), management estimates the net rental arrears to be ~S$3.8m. This works out to an estimated increase of 0.19 S cent or 4.3% in its FY12 DPU. SGREIT intends to distribute substantially the net arrears received from Toshin in 1Q13, on top of the regular distributable income generated for the quarter. This is in line with our view as per our 5 Feb report that SGREIT may possibly get a boost in its DPU should the outcome from the rent review turns out to be favourable.

Maintain BUY

We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. As a recap, Toshin has on 18 Apr 2012 indicated its intention to exercise its option to renew the master lease for another 12 years starting 8 Jun 2013. Management expects the renewal rent to be determined before the commencement of the lease period. We believe further upside in rent is still possible. However, we choose to incorporate only the new rate and distribution for now. This raises our fair value from S$0.95 to S$0.98. Maintain BUY.