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Singapore Company Focus

Starhill Global REIT

Bloomberg: SGREIT SP | Reuters: STHL.SI

DBS Group Research . Equity 19 Apr 2010

BUY S$0.595 STI : 3,007.19 A landmark transaction

Price Target : 12-Month S$ 0.73 (Prev S$ 0.66)
• Asset portfolio to grow to S$2.6bn post acquisition of 2
Reason for Report : Company Update Malaysian malls
Potential Catalyst: Refinancing loans • Partially funded through new issuance of convertible
Analyst preference units (“CPUs”)
Derek TAN +65 6398 7966 • Accretion to earnings estimated at 6-13% in FY10-11F

MunYee LOCK +65 6398 7972

• Maintain BUY, TP revised to S$0.73. Adding Malaysia exposure in its portfolio. Starhill Global
REIT (SGREIT) has signed an agreement to purchase Lot 10 and
Price Relative Starhill Gallery (located in central Kuala Lumpur, Malaysia)
S$ R e la tiv e In d e x
from Bursa-listed Starhill REIT at a cost of RM 1.03 b
0 .7 0 219 (S$450.1m). Upon completion of the transaction, SGREIT’s
0 .6 5
0 .6 0 169
portfolio of assets will increase by 20% to S$2.6bn.
0 .5 5
0 .5 0
0 .4 5
Issuing new convertible units. The transaction will be
0 .4 0 69 funded through an asset-backed securitisation structure,
0 .3 5
involving cash (31% of purchase price), debt (32%) and the
0 .3 0 19
Ja n -0 9 Ju n -0 9 N o v -0 9 A p r-1 0 issuance of new convertible preference units (“CPUs”) (39%) .
S t a r h ill G lo b a l R E IT (L H S ) R e la tiv e S T I IN D E X (R H S ) The CPUs, amounting to RM405 m (est. S$177m) will be paid
an annual coupon of 5.65%, and convertible into new SGREIT
units at a 30% premium to the last vwap upon listing of the
Forecasts and Valuation
CPUs. There is a moratorium of 3 years before the conversion,
FY Dec (S$ m) 2008A 2009A 2010F 2011F
which will turn mandatory after 7 years.
Gross Revenue 127 135 166 185
Net Property Inc 96 107 131 150 6-13% accretion to FY10-11F distributions. Upon
Total Return (137) (46) 74 86 completion, we estimate distribution income accretion of c6-
Distribution Inc 69 75 78 86 13% in FY10-11F. We have also accounted for the conversion
EPU (S cts) 2.5 4.7 4.1 4.9 of all of the CPUs in year 3 into new SGREIT units.
EPU Gth (%) (39) 91 (13) 22
DPU (S cts) 5.5 5.7 4.0 4.4
BUY, TP adjusted S$0.73. Maintain our BUY call, with
DPU Gth (%) 79 3 (29) 10
NAV per shr (S cts) 141.7 81.3 90.1 90.6 adjusted target price of S$0.73 assuming the full conversion of
PE (X) 24.2 12.7 14.6 12.0 the CPUs from FY13 after moratorium period. Further price
Distribution Yield (%) 9.3 9.5 6.8 7.5 catalyst in our view may come from: (i) stronger than expected
P/NAV (x) 0.4 0.7 0.7 0.7 1Q10 results, and (ii) clarity of its refinancing plans for majority
Aggregate Leverage (%) 30.1 16.0 27.6 28.3 of its loans due in Sept 2010.
ROAE (%) 1.6 4.2 4.7 5.4

Distn. Inc Chng (%): 5.8 13.1 At A Glance

Consensus DPU (S cts): 3.9 3.7 Issued Capital (m shrs) 1,935
Mkt. Cap (S$m/US$m) 1,151 / 837
ICB Industry : Financials Major Shareholders
ICB Sector: Real Estate Investment Trust YTL Corp Bhd (%) 28.8
Principal Business: Real estate investment trust investing primarily in
Amercian International (%) 21.6
prime real estate used mainly for retail and/or office purposes.
Free Float (%) 49.6
Avg. Daily Vol.(‘000) 2,416
Source of all data: Company, DBS Vickers, Bloomberg
Refer to important disclosures at the end of this report
ed: MY / sa: JC
Company Focus
Starhill Global REIT

Securing the Malaysian portfolio Lot 10 re-opened after massive renovations in Oct 2009 with
a new concept and new look targeted at the young
Adding prime assets in Malaysia into its portfolio. In a widely urbanites. Post completion of the face-life, the mall houses
anticipated deal, Starhill Global REIT’s (SGREIT) portfolio looks flagships stores like Apple (largest store in Malaysia), Isetan
set to add an additional S$450.1m (RM 1.03bn) of assets and Debenhams.
with the trust signing a purchase agreement with Bursa-listed
Starhill REIT to purchase two properties (Lot 10 and Starhill Lot 10
Gallery – both located in central Kuala Lumpur, Malaysia).
Upon completion of the transaction, SGREIT’s portfolio of
assets under management will increase by c20% to S$2.6bn.

The assets are purchased through a tax efficient asset-backed

securitisation structure (“ABS structure”) where incomes are
not be subjected to withholding taxes in Malaysia.

“EGM” sought on both REITs. As the transaction involves

interested parties, both Starhill Global REIT and Starhill REIT
will be convening an extra-ordinary meeting (“EGM”) for
unitholders to vote upon the acquisition. Source: DBS Vickers, company

The Assets Purchase price appear fair. Based on the initial acquisition
announcement, the purchase consideration of RM$1.03bn
Starhill Gallery. This is a FH ultra luxurious retail property (S$450.1 m), which is near to the latest appraised value done
located along Jalan Bukit Bintang with a total NLA of 297,354 in 26th Feb 2010 & 1st March 2010. The purchase price on a
sqft. The building comprises a 7-storey building with 5 psf basis for the 2 Malaysian malls represents a 30-50%
basement levels and is part of an integrated development discount to latest valuation of Suria KLCC and similar to latest
including a hotel known as JW Marriott Kuala Lumpur. Latest valuation of Sungei Wang Plaza nearby.
occupancy at the retail mall remains high at 96%. Tenants
range from international brands and prominent local retailers Acquisition details
like Louis Vuitton, Audemar Piguet, Chopard and Bottega Purchase price Latest Premium/
Venetta. Valuation (Discount) Yield
** (%) (%
Starhill Gallery RM’m RM RM’m
Starhill Gallery 629.0 2,114 629.0 to (0.0%) 7%
Lot 10 parcels 401.0 1,599 401.0 to (1.0%) 7%
Total 1,030 1,069

Nearby malls latest valuation

Malls psf
Suria KLCC 2,927
Source: DBS Vickers, company website Sungei Wang 1,500
Lot 10. This property in 137 strata parcels has a leasehold Source: DBS Vickers, company website
interest expiring 2076. Lot 10 consists of an 8-storey building * Noted that Sungei Wang Plaza is a strata-titled property held
with a basement and lower ground floor together with a 7- through subordinated notes & bonds by CapitaMalls Asia
story annex building. Latest occupancy rate is at 97%. ** As per latest appraised valuation as of 26th Feb/1st March 2010.

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Company Focus
Starhill Global REIT

Impact on Starhill Global REIT portfolio Pro-forma exposure (by gross revenues)
Earnings certainty with underlying master lease arrangement
with YTL. The properties will be master-leased back to YTL Australia
Corp Berhad under a fixed tenancy term of 3+3+3 years,
reducing volatility to earnings. Based on the acquisition price,
the injection yield of the 2 malls is estimated to be c7.0%,
which in our view compares favorably to current yield on
book (5.7%). In addition, fixed step-up feature of c7% every China
3 years will provide a natural in-built growth in earnings for 61%
SGREIT over the next 9 years. Japan
Master lease arrangement to YTL Source: DBS Vickers, company
Rental income Rental income % growth
RM$’m S$’m* Gearing estimated to remain low at c28%. SGREIT’s gearing
Year 1 – 3 $72.1 31.5 is expected to rise to c28% post completion of the
Year 4 – 6 $77.3 33.8 7% acquisition, which is still below the S-REIT’s average of c33%.
Year 7 – 9 $82.4 36.0 7%
The low gearing will enable the reit to gear up in the future
* Based on an exchange rate of 1S$ to RM 0.437 to acquire further assets or embark on its proposed asset
Source: DBS Vickers, company enhancement activities.

Including this master lease, we estimate that, c81% and Funding sources
c79% of the group’s income is secured for FY10 and 11
respectively. Issue of new convertible preference units to part fund
acquisition. The purchase consideration of S$1.05bn
Portfolio lease expiry (including transaction costs) will be funded using a
60% combination of senior notes, cash and new issuance of
60% Before Acquisition
convertible preference units to YTL Berhad in the following
After Acquisition 47%
50% proportions.
26% 28% We note that SGREIT, as per its trust deed will issue S$4.5m
19% 21% of new units to the manager, YTL Pacific Star, as
consideration for the acquisition fee for this transaction. The
10% manager will have a 1 year moratorium for these units.
2010 2011 2012 and beyond Funding sources
Source: DBS Vickers Total Transaction costs RM $1,050 (S$460.6m)
Senior notes issued RM $330m (S$144.2m)
. Cash RM $308.7m (S$234.9m)
Issuance of Convertible RM $405m (S$177.0m)
preference shares
Issuance of Acquisition Fee RM $10.3m (S$4.5m)
Malaysia to contribute up to 8% of topline. Post completion
Source: DBS Vickers, company
of the purchase, based on our projects, the contribution from
the 2 Malaysian assets will account about 8% of topline,
while its Singapore assets (63% of topline, down from 79%
as of 4Q09) will continue to be the main driver of the group’s
incomes going forward.

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Company Focus
Starhill Global REIT

What is this CPUs? The CPUs will rank junior to debt of In addition, we have assumed full conversion of the CPUs by
SGREIT but senior to units. They will be paid a fixed coupon the holder, YTL in year 3 in our numbers, which result in a
of 5.65% p.a. for a 7 year term. The CPUs will not be non- c3% dilution from FY13 onwards.
convertible for 3 years upon issue, after which the holder will
have the right to convert into new SGREIT units at a price
30% above the issue price, which is yet to be fixed. The CPUs What next for SGREIT?
will have a mandatory conversion after 7 years from the
date of issue. Re-financing loans due. SGREIT will be looking to re-finance a
majority of its loans that will be due in Sept 2010. While we
Structure of CPUs believe that re-financing should not be an issue given the
Total Convertible units RM $405m or estimated at S$177m trust current low gearing level and strong backing from YTL
Corp, further clarity on the progress in this front will provide
Issue size will be fixed based on the
average RM to S$ exchange based on another catalyst for stock re-rating in the medium term.
the average mid-rate over the last 20
trading days, 3 business days Debt maturity profile
immediately prior to the date of
issuance of the CPUs

CPPUs par value RM $1.00

Coupon payment 5.65% for 7 years

Holder rights No voting rights at unitholder

meetings, save exceptional

Moratorium 3 years from date of issue

Redemption Manager have the right to redeem the

CPUs, however in the event that a
conversion notice is served to the
manager, conversion of the CPUs will Source: Company
take precedence

Conversion Conversion at any time after 3 years, in

whole or part by the holder.
Mandatory conversion of remaining
CPU units at the end of 7 years.

Conversion price Convertible at 30% premium to the 5-

day VWAP of the units yet to be fixed.

Source: Company releases

Earnings Impact

Accretion of c6- 13% for FY10 - FY11. The transaction is

accretive to earnings based on our estimates. Assuming that
the acqusition is completed by Jun’2010, our DPU forecast for
FY10-11F will inch up by c6% and 13% respectively to 4.1
Scts to 4.4 Scts respectively, translating to a forward yield of
6.8 – 7.5%.

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Company Focus
Starhill Global REIT

Appendix 1: ABS Structure

“ABS” Structure. The proposed acquisitions by Starhill Global Funding. SGREIT is proposing to purchase both properties
REIT of the properties will be made through the tax-efficient through the ABS structure, which will be funded through a
ABS structure, where the properties will be acquired and held combination of cash proceeds from SGREIT’s rights issue,
by Ara Bintang Berhad, a bankruptcy-remote special purpose issuance of new convertible preference units (CPUs) and the
vehicle, incorporated in Malaysia (“ABS SPV”). The issuance of senior medium term notes (“MTNs”). These MTNs
acquisitions will be made through the subscription by a will be offered to sophisticated investors.
Singapore-incorporated special purpose vehicle SG REIT (M)
Pte Ltd, wholly owned by the Trustee (“SG SPV”) of RM Noted that the acquisitions will be contingent upon the
705m of junior MTNs as well as 100,000 non-redeemable successful placement of the Senior MTNs.
preference shares of RM 0.01 each in the ABS SPV.

ABS Structure

Starhill Global REIT (SGREIT) Earnings into Singapore SPV will

be net of expenses and coupon
100% to senior MTNs


Issue CPUs : RM 405m Issues :

Singapore Cash : RM 308.7m (i) Junior MTNs
(ii) NRPS

ABS SPV Issues Senior MTNs
RM 330m

Starhill Lot 10

Source: Company, DBS Vickers

Funding sources

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Company Focus
Starhill Global REIT

Statement of Total Return (S$ m) Balance Sheet (S$ m)

FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Gross revenue 127 135 166 185 Investment Properties 2,103 1,982 2,580 2,630
Property expenses (31) (28) (34) (35) Other LT Assets 22 29 29 29
Net Property Income 96 107 131 150 Cash & ST Invts 33 298 66 32
Other Operating expenses (15) (16) (23) (19) Inventory 0 0 0 0
Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 5 3 7 8
Net Interest (Exp)/Inc (22) (23) (28) (34) Other Current Assets 0 0 0 0
Exceptional Gain/(Loss) (34) (1) 0 0 Total Assets 2,163 2,312 2,682 2,699
Net Income 25 67 80 97
Tax (1) (5) (1) (1) ST Debt 17 569 654 654
Minority Interest 0 0 0 0 Other Current Liabilities 114 30 62 69
Preference Dividend 0 0 0 0 LT Debt 649 50 132 132
Net Income After Tax 24 63 79 96 Other LT Liabilities 0 77 77 77
Total Return (137) (46) 74 86 Unit holders’ funds 1,384 1,587 1,758 1,768
Non-tax deductible Items 207 122 5 0 Minority Interests 0 0 0 0
Net Inc available for Dist. 69 75 78 86 Total Funds & Liabilities 2,163 2,312 2,682 2,699

Revenue Gth (%) 23.4 6.0 23.1 11.5 Non-Cash Wkg. Capital (108) (26) (55) (61)
N Property Inc Gth (%) 24.8 11.5 22.8 14.1 Net Cash/(Debt) (633) (322) (720) (754)
Net Inc Gth (%) (38.3) 164.8 26.2 21.6
Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0

Cash Flow Statement (S$ m) Rates & Ratio

FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Pre-Tax Income 25 67 80 97 Net Prop Inc Margins (%) 75.5 79.4 79.3 81.2
Dep. & Amort. 2 0 0 0 Net Income Margins (%) 18.6 46.4 47.6 51.9
Tax Paid (2) (2) (1) (1) Dist to revenue (%) 54.6 56.1 47.3 46.5
Associates &JV Inc/(Loss) 0 0 0 0 Managers & Trustee’s fees 11.7 11.8 14.1 10.4
Chg in Wkg.Cap. 6 (2) 29 6 to sales (%)
Other Operating CF 62 30 0 0 ROAE (%) 1.6 4.2 4.7 5.4
Net Operating CF 93 93 108 102 ROA (%) 1.1 2.8 3.2 3.6
Net Invt in Properties (16) (15) (598) (50) ROCE (%) 3.7 3.9 4.4 4.9
Other Invts (net) 0 0 0 0 Int. Cover (x) 3.7 3.9 3.8 3.9
Invts in Assoc. & JV 0 0 0 0 Current Ratio (x) 0.3 0.5 0.1 0.1
Div from Assoc. & JVs 0 0 0 0 Quick ratio (x) 0.3 0.5 0.1 0.1
Other Investing CF 0 0 0 0 Aggregate Leverage (%) 30.1 16.0 27.6 28.3
Net Investing CF (16) (15) (598) (50) Z-Score (X) NA 0.9 1.2 1.0
Distribution Paid (67) (73) (78) (86) Operating CFPS (S cts) 9.0 7.1 4.1 4.9
Chg in Gross Debt (23) (67) 166 0 Free CFPS (S cts) 8.1 5.8 (25.3) 2.7
New units issued 0 328 171 0
Other Financing CF 2 (1) 0 0
Net Financing CF (87) 187 259 (86)
Net Cashflow (10) 265 (232) (34)
Quarterly / Interim Income Statement (S$ m) P/Book Value (x)
FY Dec 1Q2009 2Q2009 3Q2009 4Q2009
Gross revenue 34 33 33 34
Property expenses (7) (6) (7) (8) 0.8
Net Property Income 27 27 26 27 0.7
Other Operating expenses (4) (4) (4) (5)
Other Non Opg (Exp)/Inc 0 0 0 0 0.7
Net Interest (Exp)/Inc (6) (6) (6) (6)
Exceptional Gain/(Loss) (2) (129) (8) 5 0.6
Net Income 15 (112) 9 21 0.6
Tax (1) (2) (1) (1)
Minority Interest 0 0 0 0 0.5
Net Income after Tax 14 (114) 8 20
Total Return 0 0 0 0 0.5
Non-tax deductible Items 5 133 10 (1) 0.4
Net Inc available for Dist. 18 18 18 19
Revenue Gth (%) 1 (3) (2) 5
N Property Inc Gth (%) 4 0 (3) 3 0.3
Net Inc Gth (%) (219) (888) (107) 136 Jan-09 Jun-09 Nov-09 Apr-10
Net Prop Inc Margin (%) 78.8 80.9 80.1 78.1
Dist. Payout Ratio (%) 94.5 100.0 100.0 100.0

Source: Company, DBS Vickers

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Company Focus
Starhill Global REIT

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Company Focus
Starhill Global REIT

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