REIT Financial News - 16 APR 2010: Starhill Global enters into conditional sale and purchase agreements to acquire Starhill Gallery and Lot 10 for S$450.1 million

Starhill Global enters into conditional sale and purchase agreements to acquire Starhill Gallery and Lot 10 for S$450.1 million. See news release and report.

Key Points 

• The Reit has entered into conditional sale and purchase agreements to acquire Starhill REIT's interests in Starhill Gallery and Lot 10 Shopping
  Centre in KL for a total consideration of RM1,030.0 million (approximately S$450.1 million).
• Starhill Gallery will be acquired for RM629.0 million (approximately S$274.9 million) and Lot 10 will be acquired for RM401.0 million (approximately S$175.2 million).
• The acquisitions will be made through a tax efficient asset-backed securitisation (ABS) structure and will be funded by:
• cash payment of RM300.0 million (approximately S$131.1 million) and the issuance of the S$ equivalent of RM405.0 million (approximately S$177.0 million) in convertible preferred units ("CPUs").
• the issuance of RM330.0 million (approximately S$144.2 million) of five-year senior medium term notes ("Senior MTNs")  
• About The CPUs:
• will be classified as equity and therefore, will not result in an increase in Starhill Global REIT’s aggregate leverage.
• conversion price will be fixed at a premium of 30% above the 5-day
  volume weighted average traded price of Starhill Global REIT’s units prior to and including the issue date.
• can only be converted after three years from the date of issuance with a mandatory conversion at the end of seven years from the date of issuance.
• The Properties will be leased to Katagreen Development Sdn Bhd (the "Master Tenant"), a wholly-owned subsidiary of YTL.
• There will be a fixed tenancy term of 3+3+3 years commencing on the completion of the Acquisitions, at the aggregate annual rental of RM72.1 million (approximately S$31.5 million) for the first three-year term, RM77.3 million (approximately S$33.8 million) for the second three-year term and RM82.4 million (approximately S$36.0 million) for the third three-year term.
• The payment obligations of the Master Tenant under the master tenancy agreement will be guaranteed by YTL.
• PRO FORMA DPU:
• Assuming that the Acquisitions were completed on 1 January 2009 and the CPUs were not converted, DPU for FY2009 would have increased by 13.0% or 0.50 cents to 4.36 cents.
• Assuming full conversion of the CPUs on 1 January 2009, FY2009 DPU would have increased by 12.4% or 0.48 cents to 4.34 cents.
• PRO FORMA NAV:
• Assuming the Acquisitions were completed on 31 December 2009 and the CPUs were not converted, the NAV would have increased by 11.0% or 9.0 cents to S$0.91 per unit.
• Assuming full conversion of the CPUs on 31 December 2009, the NAV would have declined marginally by 1.2% or 1.0 cent to S$0.81 per unit.
• Upon completion of the Acquisitions, Starhill Global REIT’s aggregate leverage as at 31 December 2009 would have marginally increased from 26.9% to 29.0%.

Author's Note 
Following the Reit's initial announcement about the acquisitions on Nov 18 2009, the details about the funding has finally been announced.

Although the CPUs have been classified as equity and hence will not increase the gearing, we have to take note of the diluting impact when conversion of the CPUs kicks in after 3 years. Some quick back of the envelope calculations based on the latest closing price of 0.595 on 15 APR 2010, and the pro forma DPU and NAV assuming full conversion of the CPUs:

• Annual DPU = 4.34 cents
• Yield = 0.0434/0.595 = 7.29%
• Discount from NAV = (0.81-0.595)/0.81 = 26.5%
• Gearing = 29%