OCBC Investment Bank maintains BUY call on YTL's Starhill Global REIT with Target Price of S$0.98

OCBC Investment Bank, March 5, 2013

By Analyst Kevin Tan & Eli Lee

Poised for Growth

Completion of Plaza Arcade acquisition
YTL's Starhill Global REIT (SGREIT) announced that the acquisition of Plaza Arcade in Perth, Australia has been completed last Friday. The purchase consideration of A$48.0m (~S$61.0m) was 40% funded by proceeds from SGREIT’s 2009 rights issue with the balance funded by its revolving credit facilities. This is expected to increase its gearing level marginally from 30.3% to 31.0%, according to our estimates. As a recap, Plaza Arcade is a freehold retail property with an NLA of 25k sqft and enjoys a high occupancy of 97.6%. It is located next to SGREIT’s David Jones Building, which gives the REIT opportunity to gain from synergies through asset enhancement. At an NPI yield of 7.8%, we expect the transaction to be DPU accretive, adding 0.08 S cent to SGREIT’s FY13 DPU.

Enlarged DPU expected in 1Q13
Apart from the maiden contribution by Plaza Arcade, SGREIT is also likely to get a boost in its 1Q13 DPU, due to the distribution of ~S$3.8m accumulated net rental arrears expected to be received from Toshin during the quarter. The arrears arose as a result of the retrospective application of the new rental rate (10% increase in base rent) for the term commencing 8 Jun 2011, of which SGREIT has been awarded following the conclusion of the Toshin rent review process. SGREIT intends to distribute substantially the net arrears in 1Q13, on top of the regular distributable income generated for the quarter. Hence, we expect its 1Q13 DPU to be up-sized.

Maintain BUY
We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. We believe further upside in rent is still possible, given that Orchard Road rental and occupancy rates have been holding up well. In addition, SGREIT may possibly benefit from interest savings following the refinancing of its term loan maturing in Sep. As such, we are positive on SGREIT’s performance going forward. Maintain BUY with an unchanged fair value of S$0.98.