MMP – DBS

Looking forward to next year’s bonus

Potential bonus for MMP next year – Toshin lease renewal. We highlight a key point in terms of organic growth for MMP, with its master lease with Toshin up for renewal in June 08. The master lease is expiring in 2013 with an option to renew for another 12 years. Under the lease arrangement, rents are reviewed every three years with a maximum upward revision of 25%. With the master lease currently under-rented at around the S$11 psf level, we think there is a potential for the next rental review to edge towards the higher end of the 25% cap on positive rental revision.

Acquisitions momentum still at an early stage? To recap, MMP has recently begun its cross-border acquisition growth path with i) acquisition of a portfolio of seven properties in Japan for MMP’s debut deal; and ii) 50% of retail asset, Renhe Spring Department Store for RMB150m in Chengdu. Moving forward, MMP has also secured ROFR on vendor Renhe’s property ventures, which could imply an alternative acquisition pipeline for MMP gaining more momentum moving forward in terms of acquisitions in the absence of a developer sponsorship.

Enjoying office rental reversions. With the very tight office supply situation in the CBD, other alternative office locations are also enjoying positive spillovers. Asking rents for Wisma Atria and Ngee Ann City are already at S$13 and S$12 respectively and we expect closing rents to edge upwards.

Maintain Buy with raised TP of S$1.48. We are raising our target price on the premise of two factors: I) Assuming a base case scenario of bargaining power shared between landlord and tenant, we now impute a potential rise in retail rentals for the Toshin lease to 12.5% when the renewal is up; and ii) higher imputed office rents of S$11 and S$12 for Ngee Ann City and Wisma Atria respectively. This leads to our higher DCF-based target price of S$1.48 and maintain our Buy recommendation. Key risks to our recommendation include i) inability by the REIT manager to secure positive renewal rates for the Toshin lease and ii) acquisitions from third-party assets do not gather pace to imply growth justifying yield compression.