Starhill Global REIT

Kim Eng on 25 Jul 2012

1H12 earnings inline. SGREIT’s 2Q12 revenue rose by 5% YoY to SGD46.4m, while the distributable income for unitholders increased by 4% YoY to SGD21m. 1H12 revenue at SGD92.4m, up 3% YoY, was 50% of our FY12 forecast and consensus estimate. 1H12 DPU at 2.15 SG-cts, up 2% YoY, was 50% of ours and consensus estimate.

Wisma Atria harvesting upside. Wisma’s AEI is completed in 2Q12 with all Orchard road fronting stores commencing business. ROI is 12.8%, exceeding the initial target of 8%. (CAPEX ~SGD31m), representing an annualized incremental NPI of SGD3.9m (based on secured tenancies as at 30 Jun 2012). Positive rental reversions of ~33% was achieved for leases committed between Jul 2011 to Jul 2012, since the start of the AEI. Wisma’s 2Q12 retail revenue rose 7.5% QoQ to SGD13.045m while average passing rent is up SGD34.29 psf/mth from SGD33.30 psf/mth last quarter, according to our estimates.

Portfolio review. Wisma’s retail and office occupancy improved to 99.5% and 99% from 95.3% and 96.8% last quarter respectively. Similarly, Ngee Ann City retail maintained at full occupancy while Ngee Ann City  office occupancy improved to 98% from 97% last quarter. However, we noted that there was a 520bps occupancy dip in the Japan portfolio (representing 4.3% of 2Q12 revenue), due to a sharp occupancy decline in the Daikanyama mall (from 100% in 1Q12 to 62.6% in 2Q12).

Toshin rental review. Despite the court tussle having gone before the Singapore court of appeal, Toshin has exercised its option to renew Ngee Ann City (NAC) retail for another 12-year term, expiring in 2025, thus lowering the lease expiry in 2013 from 89.6% of gross rent last quarter to 3.8%. The next rent review will be in 3-years time. Toshin constitutes 88.6% of NAC retail gross rent as at 30 Jun 2012 and is SGREIT’s largest tenant (18.8% of portfolio gross rent). 2Q12 average passing rent at NAC retail stays at depressed levels of SGD13.60 psf/mth from our estimates.

We expect marginal increment until the next rent review. Deserving better. A prime retail play trading at a sharp 20% discount to its book value, Starhill Global REIT deserves better in our opinion. For one, its 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 like Starhill for the rental upside at Wisma Atria and income stability in Malaysia and Australia. At 6.1% FY12F yield, we reiterate BUY with a DDM-derived TP of SGD0.76.