StarHill Gbl – DBS

A landmark transaction

• Asset portfolio to grow to S$2.6bn post acquisition of 2 Malaysian malls

• Partially funded through new issuance of convertible preference units (“CPUs”)

• Accretion to earnings estimated at 6-13% in FY10-11F

• Maintain BUY, TP revised to S$0.73.

Adding Malaysia exposure in its portfolio. Starhill Global REIT (SGREIT) has signed an agreement to purchase Lot 10 and Starhill Gallery (located in central Kuala Lumpur, Malaysia) from Bursa-listed Starhill REIT at a cost of RM 1.03 b (S$450.1m). Upon completion of the transaction, SGREIT’s portfolio of assets will increase by 20% to S$2.6bn.

Issuing new convertible units. The transaction will be funded through an asset-backed securitisation structure, involving cash (31% of purchase price), debt (32%) and the issuance of new convertible preference units (“CPUs”) (39%). The CPUs, amounting to RM405 m (est. S$177m) will be paid an annual coupon of 5.65%, and convertible into new SGREIT units at a 30% premium to the last vwap upon listing of the CPUs. There is a moratorium of 3 years before the conversion, which will turn mandatory after 7 years.

6-13% accretion to FY10-11F distributions. Upon completion, we estimate distribution income accretion of c6-13% in FY10-11F. We have also accounted for the conversion of all of the CPUs in year 3 into new SGREIT units.

BUY, TP adjusted S$0.73. Maintain our BUY call, with adjusted target price of S$0.73 assuming the full conversion of the CPUs from FY13 after moratorium period. Further price catalyst in our view may come from: (i) stronger than expected 1Q10 results, and (ii) clarity of its refinancing plans for majority of its loans due in Sept 2010.