MMP – DBS

Not just one but seven

Finally, not one but seven. After listing in Sept 2005, MMP has finally delivered acquisitions to drive yield accretion. And for MMP’s debut deal, it is not just one, but a basket of seven properties for S$182.5m at property yield of 4-4.2%, located in various prime areas of Tokyo which is spread across Roppongi, Shibuya-ku, Minato-ku and Meguro-ku. Six of the assets (Fund Creation portfolio) are completed assets with income generation, most with 100% occupancy, while the remaining asset (FLEG America-Bashi Building) is a retail/office building in the Shibuya-ku area currently under construction and expected to complete in Sept 07. Completion of the acquisition of the Fund Creation portfolio is expected to complete by May and FLEG America-Bashi Building on a completion basis.

Yield accretion fully funded by debt. With current gearing of 25.6% preacquisition, MMP has considerable debt capacity to pursue yieldenhancing transactions. We expect MMP to fund its debut acquisitions fully by lower cost of borrowing in Japan, and estimate about 0.1 cents DPU accretion on full income contribution from these assets.

Time to bridge the gap. With a first acquisition from Japanese real estate developer FLEG International, this could mark the first of more acquisitions to be sourced from Japan as part of a possible indirect 3rd party pipeline. Moving forward, should MMP rack in more acquisitions and illustrate the Reit manager’s deal sourcing capability, we could see further yield compression for MMP and narrow the yield gap between MMP and other retail S-Reits which are trading at a comparative premium backed by developers.

Maintaining Buy, TP S$ 1.34. We have factored in the above acquisitions into our DCF calculations and arrive at fair value of S$ 1.34. At 5.1% distribution yield compared to other retail S-Reits currently trading at 3.5%, this suggest room for further upside with yield compression. Hence, we maintain our BUY call for MMP REIT, and target price of S$ 1.34 based on DCF valuation. Downside risk is limited due to resilient prime retail rents and office market upswing.