MP REIT – DBS

Prime Orchard Landlord

Story: MP Reit announced their 2Q08 in line with expectations. Gross revenues grew 27.8% yoy to S$30.2m while NPI increased 29.2% yoy to S$23.1m. Distributable income came in 18.7% higher yoy at $33.3m, resulting in a DPU of 1.78 cts.

Balance sheet remains strong with a gearing ratio of 28.9%as at 30 Jun 08 and interest cover of 4.8x. Interest costs remain relatively low at 2.76%. In the near term, MP Reit is in the process of renewing c$220m of expiring debt.

Point: Performance was largely organic in nature arising from higher rental reversions and contributions from its overseas properties despite some disruptions at their Chengdu asset resulting from the earthquake. Moving forward, DPU growth is likely to grow even stronger with (i) rental reversions from another 13% of portfolio NLA up for renewal in FY08, 15% in FY09, (ii) impact of 19.75% increase in rent from Toshin lease, and (iii) AEI activities done on Ngee Ann City will start contributing in 2H08. Key data points to look out for in the near term will be the outcome of the strategic review which management of MP Reit has yet to conclude.

Relevance: Maintain BUY, TP adjusted to $1.39 from $1.61. We have adjusted our DCF valuation downwards to take into account a higher risk free rate of 3.9% and a lower terminal growth of 1%. At current price, MP Reit is trading at an attractive 0.7x P/BV, backed by quality assets and offers a FY08-09 DPU yield of 7.0% and 7.2% respectively.