StarHill – UOBKH

Embarking On Campaign For Regional Expansion

Surprised by sudden rights issue. Starhill Global REIT (SGREIT) has announced a fully underwritten renounceable 1-for-1 rights issue at S$0.35 per rights unit to raise S$337.3m. The rights units are priced at a 45.3% discount to the last closing price of S$0.64. Rights units are entitled to distribution accruing starting 1 Jul 09. The joint lead managers and underwriters of the rights issue are DBS, Merrill Lynch and Credit Suisse. YTL Corporation has undertaken to subunderwrite up to 75% of the total rights issue. An EGM will be held on 13 Jul 09 to seek approval from unitholders for a whitewash resolution to waive their rights to receive a mandatory offer from YTL.

Embarking on campaign for regional expansion. SGREIT intends to pursue acquisitions, embark on asset enhancement initiatives and pare down its debts. It is scouting for opportunities to invest in distressed assets in Singapore, Malaysia, China, Japan and Australia, particularly from distressed sellers having difficulties in refinancing debt. In Malaysia, SGREIT could potentially acquire retail assets from Starhill REIT which is listed on Bursa Malaysia. The company targets an asset size of S$3b within two years.

SGREIT plans to invest S$100m for an asset enhancement initiative at Wisma Atria (plans not finalised yet), which will add 40,000sf of retail space fronting Orchard Road. Reducing debt will also help it attain a lower cost of borrowing when refinancing S$617m of debt facilities due next year.

Cut target price. We have cut our 2010 DPU forecast by 40.7% to 3.5 cents due to dilution from the rights issue and trimmed our assumptions for office rentals at Ngee Ann City and Wisma Atria. We cut our target price by 25.2% to S$0.80 based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.0%).