LMIR – OCBC

1Q10 misses the mark as rental guarantees expire

1Q10 results below expectations. LMIR Trust reported 15.7% YoY and 3.4% QoQ gains in 1Q revenue and net property income to S$21.6m and S$20.3m respectively, primarily due to the strong Indonesian Rupiah (IDR) against the Singapore Dollar (SGD). By our estimates, revenue and NPI were slightly negative to flat YoY and QoQ in IDR terms. Revenue and NPI missed our estimates by 8.9% and 7.6% respectively. Meanwhile, distributed income fell 11.5% YoY but rose 3.5% QoQ to S$12.9m or 1.20 S cents per unit. We believe this is due to the appreciation in the IDR, as the hedged rate on distributions is significantly higher than the physical rate. Consequently, LMIR booked a realized (cash) forex loss this quarter of S$1.7m versus a loss of S$0.9m in 4Q09. DPU was within 5% of our expectation of 1.26 S cents.

Mall occupancy falls 2.2ppt versus 31 Dec to 93.8%. Malls such as The Plaza Semanggi (the second largest income contributor among the retail malls), Bandung Indah Plaza (third largest contributor) and Ekalokasari Plaza recorded occupancy declines of 600 basis points, 470 bps, and 820 bps respectively. The manager attributed the occupancy declines (-220 bps overall) mainly to the expiry of rental guarantees, granted by the vendor at the time of LMIR’s IPO, on spaces that had undergone extensive asset enhancement. After including temporary leasing and new leases committed by way of signed letters of intent, occupancy at Mar 2010 is 96% (flat). The manager said that with improving sentiment, it continues to receive various leasing enquires for vacant space. It is also re-mixing its tenant profile as it positions the portfolio for a more favorable retail climate.

Easing earnings estimates slightly. LMIR re-iterated that while the retail property market might start to benefit from a strong macro environment, LMIR will not see any “material benefit” in 2010 as “the portfolio has a very defensive position with very low upcoming expiries and already high occupancy levels”. The REIT manager said it continues to source for new acquisitions to take advantage of its low leverage of 10.2% debt-to-assets. We are now factoring in lower occupancy assumptions for FY10 and FY11. Our revenue estimates decline 2.7% and 3.7% for FY10-FY11F. In line, we adjust our DPU estimates for FY10-FY11F down by 3.3% and 4.3% to 5.0 S cents and 5.2 S cents respectively. Our fair value estimate, at a 20% discount to SOTP value, declines to S$0.55 from S$0.59 previously. With a 23% estimated total return, we maintain our BUY rating.