Share Price S$0.785
Target Price S$0.930
Building Sustainability For The Long Term; Upgrade To BUY
Starhill Global REIT is building sustainability for the long term, having successfully secured refinancing at attractive rates (2.4%) while growth momentum remains intact with rental reversions secured. Further upside potential could come from acquisitions and asset enhancements. Upgrade to BUY (from HOLD), as valuations are attractive relative to peers, with a marginally higher target price of S$0.93 (from S$0.92) based on DDM.
• Locking in long-term financing following the drawdown of S$422m 3- year and 5-year loans and ¥700b (S$88m) 3-year loans. All-in-cost of debt for the new loans is a favourable 2.4%, compared with an average interest rate of 3.03% as at 2Q13. Following the refinancing, Starhill Global REIT (Starhill) will not have any refinancing requirements until 2015.
• Near-term growth momentum intact with full-quarter contributions from new tenants at Wisma Atria (Etam, i.t, Lacoste and Liu Jo) and positive rental reversions for Starhill Gallery and Lot 10 (+7.2% from 28 June) and Toshin master lease (+6.7% from 8 June).
• Offering the highest yields for a Singapore-centric retail REIT with a forward yield of 6.4%, which is 40-100bp above comparable retail SREITs and is 60bp above the sector average yield of 5.8%. P/B for Starhill is also the lowest amongst its retail S-REIT peers at 0.89x, 0.2x below the sector average of 1.09x.
• Building sustainability for the long term as although the new loans will only result in marginal cost savings, due to the lower proportion of yen-denominated loans (11% of outstanding loans from 19%), the refinancing enables Starhill to extend its debt maturity (3.5 years from 1.2 years in 2Q13) and lock in the current low financing costs. In addition, Starhill has also fixed or hedged 94% of its debt via interest rate swaps and caps, limiting cost upside. The new loans are also unsecured, enabling Starhill to raise the proportion of unencumbered assets to 79% from 42%. This, coupled with the credit rating upgrade by Standard and Poor’s (to BBB+), will mitigate the impact of rising interest rates on Starhill’s distributions.
• Acquisitions likely from Australia and Malaysia in key gateway cities, together with properties in the Orchard belt. Near-term asset enhancement opportunity would be to integrate the recently-acquired Plaza Arcade in Perth with Starhill’s David Jones Building. Starhill has a debt headroom of S$460m for acquisitions from its current gearing of 30.3% assuming a target gearing of 40%.
• We have adjusted 2013 and 2015 DPU by -2% to +2% after factoring in recent rental weakness in China, together with lower interest costs.
• Upgrade to BUY (from HOLD) with a marginally higher target price of S$0.93 (from S$0.92), based on Dividend Discount Model (required rate of return: 7.0%, terminal growth: 1.8%) to value Starhill.
Share Price Catalyst
• Positive newsflow on rentals, occupancies, yield-accretive acquisitions, and asset enhancement initiatives (AEI).
Publish date: 24/09/13