MMP – Phillip

First Acquisitions since listing

MMP REIT has done its first acquisitions since listing on the 20th Sept 05. MMP has entered into three separate conditional sale and purchase agreements to acquire seven properties in Tokyo, Japan for a total purchase price of approximately S$182.5m. This represents a discount of 1.5% to the appraised value of approximately S$185.4m. Properties under management will increase by 12% to S$1683m.

Minimal DPU Impact. The pro forma financial effect of the acquisitions on DPU for the FY06 would be an additional 0.108 cts per unit, representing an initial yield accretion of 1.9%. The Manager will finance the acquisitions wholly with debt. Upon completion of the acquisitions, the gearing ratio of MMP REIT is expected to increase from 25.6% to 34.0%. The date of completion may be extended until 31 May 2007. This translates to an additional DPU of 0.04 cts for FY07F, representing a yield accretion of 0.7%. We estimated that a distribution income of approximately S$1.0m would be contributed annually from the acquisitions. This works out to be only 1.8% of FY06 distribution income. Hence, we feel that the acquisitions will not have much impact to MMP DPU. This is mainly due to the low opportunity cost in Japan.

Acquisitions Information. The properties are acquired with an initial yield of approximately 4%. Local asset manager from Japan will manage the properties, with the management fee contributed by MMPs property managers fee. Profit will be taxed under Japan by approximately 12%. Average lease term for tenant is estimated to be 5.7 years. Four of the properties are under master lease. Rental rate are expected to be stable without increment during the lease term. Japan property recovering. We believe that Japan property market will rebound after 15 years of decline, backed by the recovering economy and low cost of debt. In addition, the strong demand from investment funds is also pushing up the property prices in capital city like Tokyo. We also expect Japanese yen to appreciate limiting any currency risk involved.

Valuation and recommendation. Although the DPU impact is not great, we feel that this acquisition will benefit MMP in long term. We feel that this will be a good start, and applause to MMPs first acquisitions. We expect to see more acquisitions in future. We also believe that MMPs orchard properties will continue to appreciate, increasing MMPs NAV by at least 10% this year.

With a WACC of 7.2% and a growth rate of 3.0%, we arrive at the fair value of S$1.37 for MMP. This translates to a 4.2% dividend yield and a price to net asset value of 1.1x for FY07. It represents an average spread of 1.5% as compared to the risk free rate of 2.7%. We upgrade MMP to a Buy with a 9.6% return.