• 3QFY19 DPU rose 0.9% YoY
• Tenants’ sales continued recovery
• Earnings visibility from master lease renewals

3QFY19 Results Within Our Expectations

Starhill Global REIT’s (SGREIT) 3QFY19 results met our expectations. Although gross revenue and NPI fell 0.9% and 1.8% YoY to S$51.3m and S$39.6m, DPU rose 0.9% to 1.10 S cents due largely to lower income tax expenses and a higher payout ratio of 95.8% (3QFY18: 93.7%). We note that DPU grew positively on a YoY basis for the first time since 2QFY16, albeit from a low base. For 9MFY19, SGREIT’s NPI and DPU slipped 2.2% and 2.3% to S$119.5m and 3.38 S cents, respectively, with the latter forming 73.3% of our FY19 forecast.

Wisma Atria Offers Upside Potential After Challenging Period

Wisma Atria Property (Retail)’s physical occupancy fell 1.8 ppt QoQ to 91.7%, but committed occupancy was much higher at 99.0% as management offered more competitive rents to spur demand (high single-digit negative rental reversions). As most of the committed leases would commence operations in 4QFY19, this should provide sequential improvement ahead.

Encouragingly, tenants’ sales rose 4.9% YoY awhile footfall grew 2% YoY. Management also highlighted its intention to deploy its 100k sq ft of unutilised GFA at Wisma Atria. More concrete plans will be released over the next six months, pending discussions with the relevant authorities.

This would provide further upside in the mediumto-longer term. Other positives from the quarter came from the uplift in actual occupancy for Myer Centre Adelaide by 5.5 ppt QoQ to 89.9%.

Overhang on Malaysia Leases Lifted

As a recap, we believe the new conditional master tenancy agreements with SGREIT’s sponsor for its two Malaysia properties (Starhill Gallery and Lot 10) not only lifts the overhang surrounding SGREIT (assuming unitholders’ approval is obtained), but will also provide strong earnings visibility given the long lease tenures and built-in rent step-ups.

While SGREIT has to bear the cost of an AEI for Starhill Gallery (~MYR175m capex) and also provide a rental rebate of MYR26m per annum during the asset enhancement works period, SGREIT aims to mitigate this by taking part of its management fees in units.

Overall, we are largely positive on this development. Factoring this in our forecasts and lowering our cost of equity assumption from 8.0% to 7.5%, our fair value is lifted from S$0.75 to S$0.80.

Source: OCBC Research - 29 Apr 2019