Category: StarHill
S-REITs – Kim Eng
Go Selective On REITs
Year in Review. The S-REITs has been one of the best performers in 2012 (39% price return in FY12). Last year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.
S-REITs 2013 forecast. In the absence of real sustainable global economic growth, we believe that continuing rounds of QE Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program will persist to keep interest rates low and liquidity high. This, in turn, will sustain property prices moving forward. Nonetheless, we DO NOT think that S-REITs will be able to repeat its stellar performance in 2012. In our view, S-REITs will find it challenging to complete yield-accretive acquisitions in 2013, given that property prices in most segments are already past their 2008 peak levels. We also see limited opportunities for further positive rental reversions (3-8% DPU upside per annum) as rentals face more downward pressure in 2013, following looming supply and softening of business sentiments.
Year of consolidation. 2013 is probably a year of consolidation for S-REITs, that will warrant further yield compression of at most 30-40bps, translating to a maximum of 6-8% upside. Given the high price-to-book of S-REITs (1.15x sector-wise), we downgrade S-REITs to NEUTRAL from OVERWEIGHT. For greater upside, we see more prevailing opportunities in developers (especially local high-end and diversified big caps) than landlords. We also see heightened risk of equity fund raising for S-REITs in asset enhancements, redevelopment projects or/and sponsor injections.
Stock picks. Selectively, our TOP picks remain with the more defensible Retail and Industrial REITs, namely Starhill Global (SGREIT SP, BUY, TP SDG0.85), Capitamall Trust (CT SP, BUY, TP SGD2.29) and Ascendas REIT (AREIT SP, BUY, TP SDG2.60), that can expect to benefit from near-term DPU upside with asset enhancements and ongoing redevelopment projects. We will advise investors to shun the more cyclical Office and Hospitality REITs.
StarHill – Kim Eng
Orchard Road Retail Remains in Vogue
Orchard Road supply squeeze. Between 2013 and 2016, only three malls along Orchard Road (representing ~12% of available stock) are expected to be completed – and all in 2013. They include the asset enhancement works to The Heeren (156k sq ft), Orchard Gateway (180k sq ft) and the redevelopment of 268 Orchard Road (147.5k sq ft). The Heeren will be almost fully occupied by Robinsons (which will move out of Centrepoint) and Orchard Gateway is already more than half pre-committed with tenants such as Crate & Barrel, Religion, Swatch Megastore, Nike’s new concept stall called Amplify Women’s and library@Orchard. According to property agent CBRE, Prime Orchard Road rents were unchanged QoQ and YoY at SGD31.60 psf pm in 3Q12, while the capital value for strata-titled retail space rose 3.8% YoY to SGD6,500 psf, albeit unchanged QoQ. Occupancy rate remained robust at 93.7%.
Retail demand to remain steady. Indicators are still showing a general positive tone in the retail market despite the gloom over the world economy. As of Sep 2012, the RSI, excluding motor vehicles, and the F&B sales index are up 0.7% and 2.2% YoY, respectively. Prominent store openings in 3Q12 included Mulberry (first Asian flagship store at Mandarin Gallery), Carven and Crate & Barrel (Ion Orchard), Vivienne Tam (flagship store at Scotts Square), Paris Baguette in Wisma Atria, Malaysian celebrity Chef Wan’s 1-Market and Japanese restaurant Tsukada Nojo in Plaza Singapura. We expect retail demand to remain steady on healthy tourist arrivals and domestic spending, as well as new retailers and international concepts.
Our estimates. We forecast tourist arrivals to grow at a CAGR of 5.2% over 2011-2015, reaching 16.2m arrivals by 2015 (14.2m in FY12). In our view, higher tourist arrivals will provide some form of price support for Orchard rentals, especially since there is no more known supply after 2013. We believe that Orchard retail demand will grow at a CAGR of 2.7%, outstripping overall supply increases (CAGR: 2.3%) for 2011-2015. This will cause vacancy rates to dip from 5.4% in 2011 to 4.2% in 2015. We also expect Orchard rentals to register growth of 0-2.5% pa in 2012-2015, as previous concerns over a supply overhang are removed. Thus, NPI yields are likely to remain steady at 5.0-5.2%.
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 (3Q12 passing rent at SGD35.04 psf pm) and income stability in Malaysia and Australia. At 6.1% FY13F yield and 464bps yield spread, we reiterate BUY with a DDM-derived TP of SGD0.85.
StarHill Global – DBSV
Growth from Wisma Atria
- 3Q12 result in line; 9M DPU is 76% of our full year forecast
- Rising contribution from Wisma Atria, more upside after adjusting tenancy mix and upgrading works
- Maintain BUY rating; raised TP to S$0.84
3Q12 result in line; 9M DPU is 76% of our full year forecast
Highlights
Results in line. Gross revenues and net property income grew c.5.0% to S$46.3m and S$36.4m, respectively, again driven by Wisma Atria. Y-o-y, mall revenue grew 24%, while contribution from offices jumped 15%. This helped to offset weakness in Chengdu, where revenue fell 14% due to softening demand for mid-to-high end luxury goods. In the reviewed quarter, the trust retained S$0.8m for working capital this quarter. Despite that, 3Q12 DPU still rose by 11% y-o-y to 1.11 cts (net CPPU holders). 9M12 DPU is 76% of our forecast.
Our View
Better offering, higher retail sales. Footfall at Wisma Atria fell 10% y-o-y (+6.8% q-o-q) in 3Q12, but retail sales grew 6.5%. This might be due to the improved offering after AEI was completed in July. Footfall fell y-o-y due to reconfiguration works at some level 1 shops to accommodate new tenants; work started in July and is expected to be completed by year end. This should drive positive rental reversions ahead.
Office: continued positive rental reversion. Its office portfolio remains resilient with high 98.4% occupancy rate. Although a chunky c.36% of its leases (in terms of gross rents) is due for renewal in 2013, passing rents of S$8.0–S$8.5 psf pm, which is 5-10% below current signing rents, will mitigate downside risks and at the same time drive positive rental reversion going forward.
Healthy financial metrics. Gearing remains comfortable at 31%. The REIT has secured refinancing for a A$63m term loan that will mature in Jan 2013 and will not need refinancing until Sep 2013.
Recommendation
Maintain BUY; lifted TP to $0.84. We lifted our DCF-backed TP by 3.7% and FY13/14F DPU by 1-2% after accounting for higher rental income following the shop reconfiguration, as well as adjustments to Wisma Atria’s lease profile. There is further upside from new acquisitions that we have not factored into our numbers. Our new TP offers investors a total return of >10%.
StarHill Global – CIMB
Wisma Atria stars in 3Q
Starhill’s 3Q12 was strengthened by Wisma Atria asset enhancements, completed in Jul 2012, offset by a weaker Chengdu mall. Income was retained for working capital. Toshin negotiations are still in progress but potential rental upside has already been factored in.
3Q/9M12 DPU met expectations at 25%/72% of our full-year forecast but was slightly above consensus at 26%/76%. We tweak DPUs downwards for lower margins in Japan and weaker China growth. But we raise our DDM target price as we lower the discount rate from 8.4% to 7.9%. We remain Neutral on valuation grounds.
Wisma enhancements complete
A stronger performance at Wisma Atria was largely behind the 5% yoy rise in 3Q12 revenue and 5.7% increase in NPI. After the completion of enhancements in Jul 2012, shopper traffic increased 7% qoq while retail sales went up 7% yoy. Positive rental reversions led to another quarter of NPI growth, at 24.3% yoy this quarter (2Q12: 11.5%). This was offset by a weaker performance at Chengdu mall where NPI declined 14% yoy due to a softening high-end retail market.
Update on Toshin
Following the appeal on the Toshin master lease, Starhill and Toshin have jointly requested the President of the Singapore Institute of Surveyors and Valuers (SISV) to designate three valuers for the rent valuation. This is as per directions given by the Court of Appeal in Sep, which include disclosure of instructions given to valuation firms for the seven valuation reports obtained previously. Management expects upcoming valuation to be closer to market rents. We have factored in 10% rental reversion.
China growth?
Acquisition opportunities are, in our view, hard to come by. Despite media report of sponsor YTL’s intention to expand its presence in China, we see this as a mid- to long-term positive for Starhill. China retail asset values remain lofty while luxury retail sales remain soft amidst a saturated market in certain cities.
StarHill Global – OCBC
Valuations still attractive
- Extended debt duration
- Neutral outcome for appeal
- Growth profile intact
Refinancing of loan facility
Starhill Global REIT (SGREIT) recently entered into an agreement with its lender ANZ Bank for a A$63m term loan maturing in June 2017. We understand that the new facility will be used to refinance its existing A$63m loan (due to mature in Jan 2013) taken up by SGREIT in Jan 2010 to partially fund the acquisition of David Jones Building. The new facility will be secured under similar arrangements as its existing facility. Based on our estimates, SGREIT’s weighted average debt maturity will likely be extended from 1.8 years to ~2.0 years as at end Sep.
Toshin dispute to be resolved through mediation
In a separate announcement, SGREIT also updated the outcome of its appeal relating to the master lease with Toshin Development Singapore. According to management, the Court of Appeal did not find that the rent review mechanism had been rendered inoperable, as SGREIT had previously declared. However, the Court acknowledged that Toshin did not act in good faith in agreeing on the prevailing market rental values during the early stages of the review exercise. Hence, the Court ordered both parties to jointly request the President of Singapore Institute of Surveyors and Valuers to appoint three valuation firms to determine the prevailing market rental rates. Our take on this development is neutral, as we have not factor in any rental upside resulting from a favourable outcome. But we note that SGREIT has achieved its motive of sending a strong signal to the valuers to exercise independence on the review process.
Retain BUY with unchanged fair value of $0.79
We continue to like SGREIT for its healthy financial position (aggregate leverage of 30.5%), compelling P/B of 0.85x, and growth potential. In our view, SGREIT has yet to reap the full impact of its asset enhancement initiative on Wisma Atria, which is expected to be realized in the upcoming quarters. We now adjust our forecasts to reflect the refinancing activity. Our fair value stays unchanged at S$0.79. Maintain BUY.