Starhill REIT to sell Lot 10 and Starhill Gallery
In a somewhat unexpected development, Starhill REIT is proposing to sell its Starhill Gallery and Lot 10 properties to Starhill Global REIT (which is listed on SGX).
YTL is looking to position Starhill REIT as a pure Hospitality play, while Starhill Global REIT will be a Retail play.
Starhill Global REIT is around 29% owned by YTL Corporation. This is an extract from the announcement to Bursa Malaysia:
The Proposed Rationalisation will enable Starhill REIT to concentrate on the acquisition of the prime hotel properties located both in Malaysia and internationally, in areas including Phuket, Bali, Saint Tropez and other global destinations, subject to attractive valuations which will provide yield accretive returns to the unitholders of Starhill REIT. The hospitality assets that have been identified for potential injection into the Trust would expand Starhill REIT’s portfolio to approximately RM1.6 billion.
The Heads of Agreement between vendor & purchaser provides for a proposed sale price of RM629 million and RM401 million for Starhill Gallery and Lot 10 respectively to be satisfied by cash and/or Convertible Preference Shares in Starhill Global REIT. The selling prices are pretty near current book value. This is what the Manager says:
The adjusted net book value of the Properties based on the audited financial statements as at 30 June 2009 and after adjusting for the value of 42% or 490 of the existing car park bays in Starhill Gallery to be retained by J.W. Marriott Hotel Kuala Lumpur is RM1,055.5 million. Accordingly, on completion of the Proposed Disposal, Starhill REIT is expected to realise a net loss on disposal of RM25.5 million for the financial year ending 30 June 2010. The original cost of investment of Starhill Gallery and the Lot 10 Property by Starhill REIT was RM480.0 million and RM341.0 million, respectively. Starhill REIT completed the acquisition of the Properties on 16 December 2005 on the listing of Starhill REIT on the Main Board of Bursa Malaysia Securities Berhad. The Proposed Disposal will unlock the value of the Properties as it is expected to realise an estimated distributable income of RM228.9 million for the financial year ending 30 June 2010.
Following disposal, Starhill REIT will be just left with its JW Marriot Hotel & The Residences @ Ritz Carlton Service Apartments. With all that proceeds, I hope they will buy some hotels at decent prices. I presume some of them will be YTL connected assets, I’m always concerned when it comes to related party transactions.
But at the same time, I don’t want to end up with another cash vehicle in my portfolio… got enough of this with my overly conservative investment strategy.
The RM1.6 billion mentioned sounds like they will gear Starhill REIT with close to a billion ringgit eventually to buy all those identified assets. But its hard to tell at this stage as we don’t know how much Cash/Convertible Prefs it will be getting from Starhill Global.
This development should be watched closely by Starhill REIT unitholders.
10.23 (0.78%)
6.000 (0.12%)
November 22nd, 2009 at 10:47 am
Hi Larry,
Seems like you’re cashing out.
ya?
This latest development is a bit worrying because there is no clear direction on which property will be injected into Star Reit, the fair price and the performance of the property whether it’s making money, etc.
From the brand name perspective, pangkor laut and tanjung rhu resorts will add value to Star Reit. But again, they didn’t comment anything.
Do you know how much percentage of the revenue that Stahill and Lot 10 generates currently? What could be the significant impact on Star Reit annual performance and dividend payout after the sale?
Thx
November 22nd, 2009 at 11:50 pm
Hi Chan, I think I’ll hang in there for now…. the uncertainty is a bit of a worry but YTL still holds around 65% of STAREIT so you’ve got a bit of insurance there. I suspect that YTL has done its forward planning, STAREIT will not sit on cash for too long. All the hotel & tourism assets are all lined up for injection, probably at a huge price but this should be underpined by “earnings” (which may or may not be real).
If in the unlikely event that Stareit sits on cash for a long time, then distributions will be hit big time. In terms of valuation, I believe Starhill Gallery and Lot 10 are close to 70% of total property value. In terms of rental received in FY2008, here are the figures from their Annual Report (p31-33):
Starhill Gallery – RM37.9 million
Lot 10 – RM25.6 million
JW Marriot RM21.1 million
The Residences – RM8.4 million
If you replace Starhill Gallery & Lot 10 with Fixed Deposit type returns, that will be bad news for investors. But I’m sure YTL knows that
November 23rd, 2009 at 12:00 pm
Hi Larry,
YTL should give a clear direction on which properties will be injected into Stareit, the current earning of the properties to be injectect, etc.
This is very important from investor point of view.
Thx
November 23rd, 2009 at 7:26 pm
I absolutely agree but I have always found Stareit to be a bit short when it comes to disclosure. I like companies like AMMB for their disclosure, since ANZ came in, it has really lifted the game in corporate transparency. Sadly even many big Malaysian corporates fall way short. Most of the time they are just spinning stories or don’t want to tell you how they make money for fear of competitors reading it.
November 24th, 2009 at 9:16 pm
The news really surprised me, just days after i initiated a position in Starhill REIT. Wonder what damage will the asset sale to its NAV (eventually the stock price) and dividend payouts as information seems to be lacking, just like the sudden decision to restructure the two REITs. I am like “what the hell” when i saw the news on The Edge.
By the way, considering Hektar and Tower REITs, which is a better choice now? Tower REIT has been up about 10% since the time i started contemplating about diversifying into REITs. Not sure if Tower has solve their tenancy expiration issue. Hektar seems to be more active, at least in providing information and their directions.
November 26th, 2009 at 6:32 pm
I wouldn’t say I was totally surprised. Concept wise, I’m OK with Starhill REIT being a Tourism fund and Starhill Global being a Retail fund. It comes down to how much Starhill REIT will pay YTL for the properties to be injected in. Let’s not jump to any conclusion first, for all we know, it could be really marvellous properties at a decent price, hmmm… am I the only wishful thinker here?
Regarding Hektar & Tower REIT, I’ve got units in both, Tower has been a better performer for me coz I got in earlier. I’m comfortable with both, except the gearing in Hektar is on the high side. Tower should have no problem replacing lost revenue from HP but not quite sure about HLA. So far no announcement yet.
November 27th, 2009 at 11:59 am
Hi Larry,
May i know what’s the gearing ratio of Hektar?
Thx
January 6th, 2010 at 10:36 pm
I had some units of stareit.. i was wondering why they sell off Lot 10 and Starhill in a lost of 23millions..
Currently Lot 10 is in some renovation.. so i’m not sure whether they are really interested to sell the 2 building or just make some rumous in the market for some individual purpose.
It did went down at the begining of this annoucement, but now seems going up..
January 8th, 2010 at 7:12 pm
Hi Lexus
The sale is mainly for restructuring purpose. Starhill REIT and Sharhill Global are in theory competitors unless they focus in different property sectors. In this case, YTL has chosen to position Starhill REIT as a tourism REIT going forward. Ideally, Starhill Global should list on Bursa Malaysia as well so that we have the option to buy into it.
February 23rd, 2010 at 1:58 pm
Hi Larry,
Just want to ask for your opinion, as I’m newbie to REIT. It seems like AmFirst is making money every quarter, and it’s operation seems okay. But why it retaining at the lowest PE of around 2.5, compare to it’s history PE11 and other REITs of around PE12? Does it means this REIT is undervalue for now? Else, what are the possible problem with this REIT?
Thanks very much.
February 23rd, 2010 at 4:41 pm
Hi Vincent, AmFirst had a big property revaluation excercise last year. Out of it’s RM179million in profit, RM142million was Fair Value Adjustments which means it is not cash profit. The important figure you need to use is the Normallized PE Ratio which works out to be around 12.5x. This excludes the FV adjustments. Also the prime office sector may feel some pressure in the near term and upside may be quite limited for now. Tower REIT would be a cheaper exposure to prime office sector if that’s what you’re looking for.
February 23rd, 2010 at 7:17 pm
Hi Larry,
I understood now. So it’s still back to the post you talked about normalized PE. AmFirst seems like having big debts.
In fact, I’m looking for leader in REITs. After compared all REITs using the info from your blog, it seems STAREIT and ALAQAR are the 2 shortlisted, in a more conservative evaluation. What do you think?
February 24th, 2010 at 10:16 am
What worrys me is that YTL will try to inject their Pangkor Laut Resort into Starreit at an inflated price. The property is very tired and a loss maker but could be given a very high capital valuation (we all know the worth of some Malaysian valuations) because of the large amount of undeveloped land (which has a negative return). In my view the property is a big white elephant. YTL may look to cash up and suck out Stareits money. John
February 24th, 2010 at 12:24 pm
@Vincent – Yep I’m a little uncomfortable with AmFirst gearing myself. Also not too sure about the Summit USJ property. Starhill REIT is in a bit of limbo right now, the picture is not so clear until we know what assets go in and at what price. I quite like Alaqar as well (although I don’t own any units), you can check out the earlier interview we had with their CEO, I mentioned to them that it would be nice if gearing can come down a bit. BSD REIT at under RM1.30 should be decent buying for the medium term, likewise Tower REIT at under RM1.10 would be OK. All these can potentially get you 12% total return over the medium term at decent risk levels. If you have a bit more risk appetite, take a look at Property Developer PLENITUDE. I’ve bought some yesterday and today at RM2.73 to RM2.80. The company has a market cap of of around RM380 million and Net Cash of RM230million+. It’s one of the rare property developers with a consistent earnings and dividend track record.
@John – YTL Corporation certainly can do with a cash injection. I agree with you on the asset injection part, I don’t think it’ll come at a fair price to STAREIT investors. But there’ll be a lot of suckers in this game and YTL plays this game well. Starhill Gallery valuation is a classic example. So for now, I’ll hold on to my Stareit. Dono’t have much of it anyway.
February 26th, 2010 at 12:23 pm
Hi Larry,
Noted and thanks for your comment. After hearing from you, I did some study on these 3 REITs again, and I would like to share with you what I found out.
BSDREIT PE seems like attractive among the 3 REITs discussed above, as well as the lowest gearing. However, it is only involved in plantation real estate so far. They have plan to acquire more lands for more income, which is good.
For TWRREIT, it only has 3 buildings with satisfying occupancy rate btw 71-100% so far. The management promised to increase the occupancy rate for HLA and HP tower. I wonder it has any plan for building acquisition this year?
As for Alaqar, it seems it has the highest gearing, with the highest average borrowing cost. In fact, it is consider okay because it has so many hospitals as a income foundation. However, it’s PE is running close to 13.
And all 3 REITs offering around the same D/Y @ 8.x. Seems like you have made the wiser choice of picking the 2. For conservative people like me, I would pick these 2 REITs too. :)
I wonder you have anything to add on.
March 2nd, 2010 at 9:06 pm
Hi Vincent, I finally had time to study BSD REIT 2009 results in more detail and wasn’t too impressed with it. If you strip out the property revaluation and profit from property sale, their result is not that impressive. Management said that average palm oil price achieved was lower than 2008. I actually sold some of my BSD REIT today. Comparitively, Tower REIT 2009 results looks quite nice although occupancy levels for Menara HLA and HP Towers took a dip at year end. But Menara HLA occupancy should be back above 90% on average for 2010. Most REITs are always on the acquisition trail but Tower REIT is very conservative when it comes to this, they have a pretty strict criteria which is good for us investors. Alaqar has structured returns worked out with KPJ Healthcare. As long as interest rates remain steady, they distributions should be quite decent.