Bonus from Toshin

Positive rent review outcome for Toshin. Starhill Global Reit (SG Reit) announced that the Toshin rent review process has been completed with a 10% increase in rent compared to our expectation of no increase in rentals.

Expect a bumper payout in 1Q13. Based on the new rent review, the base rent for Toshin will be adjusted upward by 10% from 8 June 2011 and will serve as the base rent until the next lease renewal in June 2013. Upon the adjustment, SG Reit will reap accumulated rental arrears of an estimated S$5m over the 18 month period (8 June 2011 to 31 Dec 2012). Subject to the receipts, the manager intends to distribute S$3.8m of the rental arrears after netting off expenses including leasing commissions to the unitholders in 1Q13. The higher rental will have a positive impact on earnings as the Toshin lease contributed 18.8% to SG Reit’s FY12 topline.

Positive impact on earnings. With the upward rental adjustment, FY13/14F DPU will increase 6% and 2% respectively, while TP will rise to S$0.92. We are maintaining our BUY Call.

We continue to like SG Reit for its pro-active efforts in restructuring its portfolio including its recent divestment of one of its non- core assets in Japan. We expect positive rental reversions, step-up rents in Malaysia and its acquisition of the Perth property to drive earnings growth. Re-rating catalysts could come from potential acquisitions supported by healthy gearing of 32% and further upside from rent negotiations for Toshin’s lease, which will expire in Jun13. We expect that there will be no downward rental reversion and have assumed zero growth.

Riding on positive reversions

• Results in line, lifted by SG portfolio

• Positive reversions, new acquisition, Malaysia stepping up rent and some possible interest savings to drive earnings

• Maintain BUY at a higher S$0.89 TP.

Highlights

4Q12 results in line. 4Q12 gross revenues and net property income grew c.2-3% q-o-q and y-o-y. Higher income from its SG properties helps more than offset forex losses (Yen and AUD weakened by 10% and 3% respectively) and weaknesses in Chengdu performance (-13.9% y-o-y). The trust retained S$0.6m for working capital this quarter, putting YTD amount at S$1.4m. Taking that into account and netting off CPU distribution, 4Q12 DPU rose by 12% y-o-y to 1.13cts. Full-year DPU came in at 4.39ct, which is on line with our forecast. NAV rose marginally by 2% to S$0.96 as the revaluation gains for its SG and Malaysia property were eroded by forex losses. Cap rates used for SG portfolio remained steady at 5.25% and 4.25% for retail and office assets, respectively

Our View

Continue to be lifted by positive rental reversion. Wisma Atria’s retail sales growth was +23% q-o-q, 33% y-o-y, with a healthy footfall (+15% q-o-q, -2% y-o-y) post AEI work. On a full-year basis, retail sales and shopper traffic hit S$176m translating to S$115 psf of retail sales and occupancy cost of 28%. Going forward, earnings will be driven by (i) positive rental reversions for its SG properties as the gap between expiring and recent transactions narrowed. About 26% of its office leases in terms of NLA is due for renewal in 2013, and passing rent of S$8.20 psf pm is still below current signing rent of S$9.50. Meanwhile, the average monthly rent for Wisma’s retail is at S$32 psf, still below the asking rent of S$35 – $70 psf. (ii) 7% upward reversion of rent in June 2013 for its Malaysia Property (iii) an additional c.$3.8m p.a. of net income its recent Perth (Plaza Arcade) acquisition from 2Q onwards.

Interest savings and inorganic growth possible. While, 57% of its debt was up for refinancing, we understand talk is underway to refinance and break it into with smaller tranches with differing maturities. SGREIT is looking to replace them with unsecured loans which could increase the current unencumbered ratio to 78%, from 41% currently. This may potentially trigger a rerating of its MTN notes (current triple B-). Gearing remains healthy at 32%, providing the trust ample ammunition for acquisitions. We have not assumed any acquisitions but have prudently assumed 100% conversion of its CPU as these are now trading in-the-money.

Recommendation

Maintain BUY at a higher S$0.89 TP. Our TP is raised to $0.89 as we factor in the acquisition of Perth Arcade, higher reversionary rents for SG portfolio and assume conversion of CPU. Upside could come from one-off accumulated arrears in rents from Toshin’s lease and upwards rent review due in Jun13 (not factored in yet) or new acquisitions.

CLEAR GROWTH DRIVERS

• 4Q12 results within view
  
• Strong growth from local portfolio
  
• Not resting on laurels
  

Robust growth in DPU

Starhill Global REIT’s (SGREIT) 4Q12 results came in within our expectations. NPI grew by 2.9% YoY to S$37.5m due primarily to strong contribution from its Singapore portfolio. DPU rose at a faster pace of 11.9% to 1.13 S cents on the back of lower interest costs and lower tax expenses. This set of results almost coincides with our quarterly NPI forecast of S$37.1m and DPU projection of 1.10 S cents. We note that ~S$0.6m from the distributable income will be retained for working capital purposes. For the full-year, DPU amounted to 4.39 S cents, up 6.6%. This translates to a FY12 DPU yield of 5.2%.

Local portfolio overcame softness from overseas

SGREIT’s Singapore properties contributed 63.0% to 4Q revenue, higher than the 62.3% contribution seen in prior quarter. This was partly fuelled by strong performance from Wisma Atria’s retail segment, which saw its NPI jump 23.5% to S$10.3m amid positive rental reversions, and also a 10.5% growth in Ngee Ann City office segment on higher occupancy and higher secured rentals. As a result, the strength from the local scene more that offset the weakness seen across all its overseas assets: Japan (-4.7% in NPI due to weaker JPY), Chengdu (-13.9% due to higher competition and weaker retail market) and Australia (-9.0% due to weaker AUD and vacancies between tenancies).

Maintain BUY

Looking ahead, SGREIT is exploring the possibility of an asset redevelopment of Plaza Arcade and David Jones Building to reap any potential synergies between the two buildings. On its capital management front, management is in active discussions with banks to refinance its term loan maturing in Sep, which we believe may lead to improved debt profile and interest savings. SGREIT also updated that valuers’ work on the rental valuation for Toshin master lease at Ngee Ann City is expected to be finalised by 1Q13. We now factor in Plaza Arcade acquisition and roll our valuations to FY13. This bumps up our fair value to S$0.95 from S$0.84 previously. Maintain BUY.

Strong Singapore portfolio

Singapore was the star in 4Q12, with positive rental reversions for office and a full quarter of contributions from Wisma Atria retail AEI, bringing 4Q12 DPU growth to 12% yoy. Performance for overseas assets was muted, with Chengdu still impacted by soft luxury demand.

4Q/FY12 DPU was largely in line at 26%/99% of our full-year estimates and 26%/102% of consensus. We adjust FY13-14 DPUs upwards to factor in the recent acquisition of Plaza Arcade in Perth, and introduce FY15 estimates. Our DDM-based target price inches up (discount rate: 7.9%). Maintain Neutral. Stronger Toshin rental valuation and sizeable acquisitions are rerating catalysts.

Singapore strength

4Q12/FY12 NPI was up 2.9%/3.4% yoy, while DPU grew 11.9% and 6.6% respectively. DPU growth was led by Wisma Atria retail which saw stronger centre sales post-AEI. NPI was up 23.5% yoy, albeit in part due to small disruptions in rental in 4Q11. Wisma Atria and Ngee Ann City office also saw positive rental reversion on 46%/55% of leases expiring in 2013 renewed. Portfolio occupancy inched up from 98.7% in 3Q12 to 99.4% in 4Q12. Chengdu asset saw FY12 NPI fall 8.7% yoy as demand for luxury retail remained soft.

More to look forward to

We continue to expect more positive reversions on the remaining office leases expiring this year. Independent valuers have been appointed for the Toshin master lease, and a stronger-than-expected rental valuation (to be finalised 1Q13) could be a rerating catalyst. S$24.7m of revaluation gains were booked, largely from Malaysia and Ngee Ann City assets, with the latter revalued up by 1.9%. We expect weakness at Chengdu to persist.

Australia acquisition

Acquisition of Plaza Arcade in Perth at 7.8% yield is a positive, but it is relatively small at 2% of portfolio value. Management estimates DPU accretion of 1.9%. Proforma gearing on completion of acquisition this quarter is c.31%. Synergistic benefits through 13k sf of unutilised space potentially converted to retail, connecting to David Jones, could kick in by 2014/15.

Results In-Line; Investment Thesis Intact

4Q/FY12 earnings inline. SGREIT’s FY12 DPU beats street estimates of 4.30 SG-cts with an upbeat payout of 4.39 SG-cts. FY12 revenue at SGD186m (+3%) was 100% of ours and consensus estimate. 4QFY12 revenue at SGD47.4m (+2% QoQ, +3% YoY) was 26% of ours and consensus estimate. FY12 DPU at 4.39 SG-cts (+7%) was 101% of ours and 102% of consensus estimates. 4QFY12 DPU at 1.13 SG-cts (+2% QoQ, +12% YoY) was 26% of ours and consensus estimates. Gearing inched down to 30.3% from 31.2% last quarter, following revaluation gains and depreciation of JPY. Net financing costs for 4QFY12 averaged 3.16% (3Q: 3.13%) with an average term of debt of 1.7 years (3Q: 1.5 years).

Wisma Atria retail harvesting upside. Wisma’s AEI is completed in 2Q12 with all Orchard road fronting stores commencing business. It was officially relaunched on 6 Sep and enjoyed a +1.7% QoQ and +21.4% YoY increase in 4Q12 retail revenue on strong rental reversion, and almost full occupancy (99.5%). According to our estimates, average passing rent continues to scale from SGD35.04 psf/mth last quarter to SGD35.82 psf/mth.

Portfolio review. Singapore properties contributed 63% of 4Q12 and FY12 revenue. Wisma’s retail and office occupancy were at 99.5% and 98.7% from 100% and 97.7% last quarter respectively. Ngee Ann City retail maintained at full occupancy while Ngee Ann City office occupancy remains flat at 98%. Despite 100% occupancy, Renhe Spring Zongbei’s 4Q12 revenue was down 13% YoY, mainly due to lower revenue amidst increased competition and softening of retail market (esp. mid to high-end luxury segment).

Toshin rental review. With regards to the master lease in Ngee Ann City, three international licensed valuers have been appointed according to directions prescribed by the Court of Appeal. The valuers’ work on the rental valuation is expected to be finalised by 1Q13. Toshin constitutes 85.3% of NAC retail gross rent as at 31 Dec and is SGREIT’s largest tenant (18.8% of portfolio gross rent). 4Q12 average passing rent at NAC retail stays at depressed levels of SGD13.68 psf/mth from our estimates.

Investment thesis 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. We also incorporated the Plaza Arcade acquisition (Perth), which we expect to complete by 31 Mar 2013, with yield-on-cost of 7.8%-8.6% from FY13-FY18 into our forecast. At 5.5% FY13F yield and 413bps yield-spread, we reiterate BUY with a DDM-derived TP of SGD0.90.