LMIR – OCBC

Triple whammy decimates 4Q DPU

Sickly 4Q. Lippo-Mapletree Indonesia Retail Trust (LMIR)’s 4Q results missed both our expectations and LMIR’s forecasts at IPO (despite contributions from a post-IPO buy). Gross revenue fell 19% QoQ to S$21.4m. We understand this was driven by expiry and early termination of leases as well as declining other income. LMIR also made a S$7m provision on
receivables, with net property income subsequently falling 51% QoQ to S$12.4m.

NAV falls 26% QoQ. LMIR also recorded a 26% QoQ fall in NAV to S$0.71. We estimate that property values slipped 9% in Indonesian Rupiah terms with the independent valuer adopting a 200 basis point cap rate expansion to reflect higher interest rates. This, coupled with adverse IDR-SGD forex movements, led to LMIR booking a S$344.5m fair value (non-cash) loss on property values. While distributable income is hedged, asset values are not, and investors bear the risk of SGD-denominated ownership of IDRdenominated assets.

Everything but the kitchen sink. Meanwhile, LMIR also decided to write off S$3.3m in fees on an unused loan facility as the manager believes acquisitions are unlikely in 2009. This is being treated as a cash charge, impacting distributions. Together, this write-off; the revenue decline; and the provision ate a substantial chunk out of 4Q distributable income, which fell 81% QoQ to S$3.2m. This translates to a 4Q DPU of 0.3 S cents, or an annualized yield of just 5% (versus 27% based on 3Q DPU).

Provision size could signal revenue model risk. LMIR attributed the S$7m provision to outstanding rents from wholesaler tenants or third-party agents who earn revenue from sub-leases on atrium spaces/corridor leases. These wholesalers are not only in arrears but have also terminated their leases. Now, we understand casual leasing contributes about 10% of total revenue. But on that basis, the exceedingly large provision is equivalent to an entire year’s worth of arrears. We also understand that LMIR does not collect security deposits from these wholesaler tenants. Early termination of leases – especially of this breed – is then a key risk, creating earnings uncertainty. We note LMIR has another S$19m in receivables, or 19% of total FY08 revenue.

Downgrade to HOLD. LMIR needs to resolve the uncertainty through better (direct) rental contracts as well as security deposits. We have lowered our earnings estimates, and will keep a close watch on earnings stability over the next few quarters. For now, LMIR’s 20% FY09F yield seems relatively expensive on a risk-reward basis. Downgrade to HOLD with S$0.24 fair value (prev: S$0.38).