MMP – UOBKH
Unassailable frontage on Orchard Road
MacQuarie MEAG Prime (MMP) REIT invests in real estate used for retail and office purposes in Singapore and overseas. MMP REIT’s initial portfolio comprises 74.2% strata title interest in Wisma Atria (WA) and 27.2% strata title interest in Ngee Ann City (NAC). WA and NAC are landmark retail malls within the Orchard Road shopping district next to Orchard MRT station. MMP REIT is managed by MacQuarie Pacific Star Prime REIT Management, which is owned by MacQuarie Bank (50%), MEAG Munich Ergo (25%) and Investmore (25%). MacQuarie Real Estate Singapore owns 23.9% of MMP REIT.
NAC: positive impact from rent review with Toshin. MMP REIT will review rental of master lease for 226,275sf of retail space with Toshin Development, a subsidiary of Takashimaya, in Jun 08. The magnitude of rent increase is capped at 25% and we have assumed an increase of 12.5% in our forecast. MMP REIT will also reconfigure 16,780sf of space previously occupied by National Library into a beauty and wellness precinct. Management expects rental to increase from S$7.10 to S$14psf pm after reconfiguration is completed in May 08.
Benefiting from positive office rental reversion. MMP REIT owns a total of 239,972sf of office space at WA and NAC. Rentals for renewed and new leases has increased from S$7.70psf pm in 1Q07 to S$12.10psf pm in 4Q07, substantially higher than average passing rent of S$6.22psf pm in 4Q07. According to Colliers, asking rents for office space in Orchard Road were as high as S$16psf pm in 4Q07.
Riding on rapid growth in Sichuan, China. MMP REIT has acquired Renhe Spring Department Store in Chengdu, the capital city of Sichuan Province, for Rmb350m or S$70m. The mall houses premium foreign brands such as Burberry, Prada, Dunhill, Ermenegildo Zegna, Gucci and Hugo Boss. The property achieved sales of Rmb263m in 2006, an increase of 23%, and will be linked to Chengdu’s new subway system in 2010. The vendor Renhe Spring Group provided guaranteed net profit of Rmb26.4m for four years, equivalent to net distribution yield of 7.5%. MMP REIT has been granted right of first refusal for another two malls in Chengdu with total GFA of more than 1m sf.
Strategic review could result in restructuring. MacQuarie Pacific Star has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The review will consider both corporate and asset level strategies and could also involve a proposal to take over 100% of MMP REIT. Management intends to refinance borrowings of S$235.8m with short-term borrowings to provide flexibility. MMP REIT has earlier established a S$2b multicurrency Medium Term Note (MTN) with tenor of one to five years.
Upgrade to BUY. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT gains full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.56%, an attractive spread of 4.32% over 10-year Singapore government bond yield at 2.24%. Our target price is S$1.55 based on 2-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).