Starhill Global REIT - Meeting the mark (CIMB)

OUTPERFORM Maintained

S$0.66 Target: S$0.74

Mkt.Cap: S$1,273m/US$1,054m

• In line; maintain Outperform. 2Q11 DPU of 1.04cts (+14% yoy) meets our estimate and consensus, at 25% of our full-year number. 1H11 DPU forms 50% of our forecast, Positives were improving occupancy and achieved rents for its office portfolio though rental reversions were expectedly negative. Starhill has secured 75% pre-commitments with good reversions for space under AEI in Wisma Atria and could beat its ROI target of 8%. Legal proceedings against Toshin are still ongoing. We continue to like the stability afforded by its master and long leases, low asset leverage and well-located assets. Downside should be limited by current valuations of 0.7x P/BV and forward yields of 6.5%, the highest for retail REITs while re-rating catalysts could come from improving office occupancy, positive rental reviews for Toshin leases, higher-than-expected returns from AEI and accretive acquisitions. No change to our DPU estimates or DDM target price of S$0.74 (discount rate 8.4%).

• Improving occupancy. Continued negative rental reversions for offices were mitigated by improving occupancy at both Wisma Atria and Ngee Ann City, where occupancy improved qoq by 1.7% pts and 1.2% pts respectively. Demand for office space by fashion and other retailers remained healthy, with leases signed at S$9-10.50psf. With rents picking up, management expects negative rental reversions to stabilise by 3Q-4Q12.

• AEI at Wisma Atria well-received. Starhill has secured 75% pre-commitments, with good reversions for space under AEI in Wisma and appears on track to beat its ROI target of 8%. Its AEI has been well-received and aided in rental negotiations and reversions for nearby leases. The worst-hit quarters should be 4Q11 and 1Q12, though work disruptions could be minimised by a 2-phase TOP and the relocation of tenants to temporary holding units. With the bottoming out of prime retail rentals, Starhill appears poised to capture rental upside on completion of the AEI in 3Q12.

• Rent reviews for 2011 underway. Legal proceedings between Starhill and Toshin over a rental review mechanism for the Toshin lease are ongoing. Rental step-up of about 6.1% on its David Jones long lease will kick in in Aug 11.

Update on overseas assets. No structural damages have been found at its Japanese properties after the earthquake. While NPI from these assets had fallen 28% yoy on lower occupancy, their NPI contributions remained low at 4% and management notes a pick-up in sentiment in recent months. Renhe Spring Zongbei in Chengdu continued to deliver good NPI growth of 17% on topline growth and expense control though growth was partly tempered by a stronger S$.

Asset leverage remained low at 30%. This still leaves Starhill with debt headroom of S$450m before hitting a gearing of 40%. Management remains on the lookout for opportunistic purchases locally and overseas, though it notes compressed cap rates for retail assets locally and in Tier-1 cities overseas. Potential overseas markets are Tier-2 cities in China. Refinancing risks are low given minimal debt maturities in 2011 and 2012.