• Divesting non-core assets
• Near-term challenges
• BUY with marginally lower FV

Streamlining Its Portfolio

Starhill Global REIT (SGREIT) recently divested its entire beneficial interests in the Harajuku Secondo Property for a cash consideration of JPY410.2m, or approximately S$5.1m. This transaction comes in at an attractive premium of 22.4% to the property’s latest independent valuation of JPY335.0m, and translates into an exit yield of 2.5%, based on its FY16 NPI figure. The property is a 3-storey building for retail use which is located in the Harajuku district in Tokyo, Japan. It formed only 0.1% of SGREIT’s portfolio by asset value.

SGREIT’s decision to divest does not come as a surprise to us, as management had been seeking opportunities to streamline its portfolio and pare down its non-core assets. Prior to this, SGREIT had divested the Roppongi Terzo property, also located in Tokyo, Japan, in Jan last year at a price of JPY2.5b. This came in at 2.5% higher than its last valuation and translated into an exit yield of 4.4%.

Operational Weakness to Persist in Nearterm…

As a recap, SGREIT reported a muted set of 3QFY17 results recently, with NPI and DPU declining by 0.9% and 6.3% YoY to S$41.2m and 1.18 S cents, respectively. The weaker performance was attributed largely to lower contributions from Wisma Atria (both retail and office), Ngee Ann City (office), Myer Centre Adelaide and its China property and a larger S$1.4m of income available for distribution which was retained for working capital purposes (3QFY16: S$475k). However, there were also bright spots, as SGREIT’s Malaysia properties, Ngee Ann City (retail) and David Jones Building turned in better performances.

Looking ahead, we expect operational challenges to persist in the near-term, although we believe this would be mitigated by a higher rental uplift of 6.12% from Aug 2017 as a result of the next lease review with David Jones.

…but Likely Priced in

We pare our FY17 and FY18 DPU forecasts by 2.4% and 1.5%, respectively, as we factor in lower rental assumptions in our model. Correspondingly, our fair value estimate is trimmed from S$0.82 to S$0.81. However, we maintain our BUY rating on SGREIT as we believe its softer growth prospects has been priced in by the market. SGREIT is trading at blended FY17/FY18F distribution yield of 6.6% and P/B ratio of 0.8x.

Source: OCBC Research - 26 May 2017