LMIR – OCBC

DPU falls QoQ on realized forex losses

DPU falls on realized forex losses. LMIR Trust reported 5% QoQ gains in 3Q revenue and net property income to S$20.6m and S$19.4m respectively. Distributed income, however, fell 6% QoQ to S$13.1m or 1.22 S cents per unit. Revenue and NPI were in line but DPU was below our expectations. The manager attributed the QoQ decline to the dramatic appreciation of the Indonesian Rupiah, which caused the gap between the hedged rate on distributions and the physical rate to reverse unfavorably in 3Q09. Consequently, LMIR booked a realized (cash) forex loss this quarter of S$0.4m versus a gain of S$1.2m in 2Q09. This pushed distributed income down despite a roughly 3% (our estimate) increase in revenue and NPI in IDR terms.

Rimo exit hits occupancy… A QoQ pick-up in casual leasing was partially offset by an anchor tenant’s exit from two LMIR malls. Rimo department store was occupying about 4,000 sq m in Istana Plaza (IP) and about 3,250 sq m in Gajah Madah Plaza (GMP). As a result, occupancy as at 30th September fell 8.5 percentage points to 89.8% at GMP and fell 15.4 percentage points to 80.1% at IP. Despite this gap, overall retail mall occupancy of 93% continued to outperform the industry average of 83% (Cushman & Wakefield).

… Adversely affects 4Q. The vacant space at both malls is being taken over by LMIR’s sister company and key tenant Matahari Department Store but the fitting out process takes time. With the timing gap between Rimo’s exit and Matahari’s official opening in December, the manager guided that 4Q09 revenue is likely to be adversely affected by the loss of income from Rimo. The unfavorable gap between the hedged rate on distributions and the physical rate could further weigh on 4Q09 distributions. Note the manager is guiding for roughly 99% occupancy at GMP and IP once Matahari opens.

Re-assessing call. We now estimate a 5% QoQ decline in 4Q DPU to 1.16 S cents. While we still like the LMIR portfolio and the medium-term Indonesia retail story, the 2H recovery we had hoped for is not taking shape as planned. The retail property sector also remains soft and we believe rents and occupancy may take longer to recover than we had previously anticipated. Realized forex losses may act as an additional drag. Yields are compelling but we think this is a good time for a breather as near-term catalysts appear anemic. Downgrade to HOLD with revised fair value of S$0.48 (prev: S$0.51).