Asset sale a positive move: OCBC prompts BUY call on YTL's SGREIT with Target Price of S$0.95

OCBC Investment Research, February 5, 2013

By Analyst Kevin Tan

Divestment of asset in Japan
YTL's Starhill Global REIT (SGREIT) announced that it had divested its entire interest in the Roppongi Primo Building in Tokyo, Japan for JPY700.0m (~S$9.5m). The transaction was done at a sale consideration equivalent to the latest independent valuation conducted as at 31 Dec 2012 and is consistent with our view that SGREIT is actively reviewing and re-balancing its Japan portfolio.

Details on the property sale
Roppongi Primo is an eight-storey office/retail building located at the Roppongi area in Minato-ward in Tokyo and is one of the smallest properties within SGREIT’s Japan portfolio, making up 7.4% and 0.4% of its Japan assets and total portfolio assets by valuation, respectively. The building was 76.5% occupied as at end-2012 (vs. 92.7% for the entire Japan portfolio), housing a fashion retailer on the ground floor and office tenants including a jeweller, dentist and real estate services company on the other floors. Based on the property FY12 NPI, the yield was 3.2%, lower than the estimated implied NPI portfolio yield of ~5.5%. As such, we welcome the move because 1) the divestment is likely to lead to an improvement in both occupancy and yield, 2) it may mean that its Japan properties are starting to gain investor interest, and 3) it is expected to reduce its gearing level by 30bps to 30.0% since the net proceeds would be used to repay its JPY loans.

Maintain BUY
Looking forward, we remain positive that SGREIT will continue to turn in firm performance, supported by strong contribution from its Singapore portfolio and incremental income from its recently acquired Plaza Arcade property in Perth. We also believe that upcoming refinancing activities and rental valuation for the Toshin master lease may provide a further catalyst for its DPU growth if favourable interest rates and rental terms are secured. We now factor in the divestment in our forecasts. Our fair value, however, remains unchanged at S$0.95. Maintain BUY on SGREIT.