Post the change in shareholding of Starhill Global REIT (SGREIT) and its management early this year, we revise our estimates in light of the weaker economic outlook in 2009. Our DCF valuation and target price is now S$0.58 (from S$1.56 pre the strategic review) and we maintain our Outperform recommendation.

Given the significant increase in new Orchard Road supply of 1.2m sq ft within this year (660k sq ft from ION Orchard, 250k sq ft from Orchard Central, and 294k sq ft from 313 sq ft at Orchard), we expect prime retail rents to fall ~10−13% this year. We have assumed that SGREIT’s retail occupancy falls to 88−90% from 96−99% by 2010.

As the bulk of the revenue from Ngee Ann City is secured under the Toshin master lease, the focus will be on maintaining performance of Wisma Atria basement retailers. The potential uplift in basement traffic once ION Orchard opens by June 2009 could boost sales and may provide some support for renewal rents.

Gearing is one of the lowest in the sector at 31% and the company has healthy interest cover of 4.3x. The majority of borrowings of S$671m is to be refinanced only in September 2010. As its S$380m CMBS was collateralised against its Orchard Road assets, which were valued at S$1.8bn as of December 2008, we see little refinancing risk given the low 20% LTV. Management is looking to refinance this at the end of 2009/early 2010. The 2009 budget provided for 40% commercial property tax rebates, which SGREIT will pass through to tenants, though possibly not across the board. The group is considering rebating loyal tenants but details are still being deliberated at the board level.

FY09−11 DPU estimates were lowered by 22−30% on lower retail rents and occupancy, as well as higher interest rates upon refinancing.

12-month price target: S$0.58 based on a DCF methodology. Catalyst: Potential uplift in basement traffic once ION Orchard opens in June 2009. Better than expected renewal rents.

Maintain Outperform. The stock has no refinancing requirements this year, is trading at a 70% discount to NAV/unit of S$1.44 and offers an attractive 14.6% FY09 yield. In the retail space, our preference is for CapitaMall Trust (CT SP, S$1.07, OP, TP: S$1.45) as we believe suburban retail rents will be more resilient than prime in a downturn.