Starhill Global REIT

Kim Eng on 23 Mar 2012

Deserving better. A prime retail play trading at sharp discount to 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. Buy Starhill for the potential of rental upside in Singapore and income stability in Malaysia and Australia.

Courting greater upside. A number of Starhill’s major leases (42% of gross rent) are due to expire next year. Chief among them is its master lease with Toshin at Ngee Ann City mall that has an option for renewal. If Starhill wins its fight at the Court of Appeal for a transparent rent review mechanism, its ability to maximise the potential for rental increase at the mall would be assured. Currently, the 225,000-sq-ft space is estimated to be leased at low teens per square foot to Toshin, which then subleases it to luxury brands like Chanel, Louis Vuitton,

Burberry and Tiffany & Co. In prime Orchard Road, the average retail rent currently stands at $35.50 psf per month. Race for prime space. Of the major retail projects (ie, more than 80,000 sq ft) in the pipeline between now and 2015, only 16% of the 2.8m sq ft of new supply is in Orchard Road and the rest in non-prime areas. Several international retailers such as Abercrombie & Fitch and Michael Kors opened their maiden stores in Orchard Road last year and other new-to-market brand names are said to be hunting for prime retail space. We expect Starhill to benefit from the scarcity of new prime retail space, asset enhancement initiative at Wisma Atria and healthy retail sales growth in Singapore.

No refinancing needs until 2013. Starhill’s next major refinancing is due next year ($558m, or 64% of borrowings), while only $27m is due this year. Gearing is relatively low at 30.8%, implying debt headroom of $436.3m for acquisitions before hitting its maximum target of 40%.

Buy prime assets at a discount. Considering its prime assets in Singapore, Kuala Lumpur and Perth, as well as a healthy balance sheet, Starhill’s steep 30% discount to its NAV does not seem justified to us. Moreover, its distribution per unit yield of 6.7% is also the highest among its peers. Maintain Buy with a target price of $0.80.