LMIR – OCBC

Staying cautious in anticipation of 2010

Spotty track record. LMIR Trust has had a spotty earnings track record this past year with DPU falling short of our expectations two out of the last four quarters for various reasons. In 3Q09, distributed income fell 6% QoQ to S$13.1m or 1.22 S cents per unit. 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. As a result, LMIR booked a realized (cash) forex loss this quarter of S$0.4m – pushing distributed income down despite a roughly 3% (our estimate) increase in revenue and NPI in IDR terms.

Tenant issues will likely impact 4Q09. In 3Q09, anchor tenant Rimo department store, which was occupying about 4,000 sq m in Istana Plaza (IP) and about 3,250 sq m in Gajah Madah Plaza (GMP), exited the two malls. As a result, occupancy as at 30 Sep fell 8.5 percentage points to 89.8% at GMP and fell 15.4 percentage points to 80.1% at IP. The vacant space at both malls is being taken over by LMIR’s sister company and key tenant Matahari Department Store but a timing gap due to the fitting out process is likely to adversely impact 4Q09 revenue. Note the manager is guiding for roughly 99% occupancy at GMP and IP once Matahari opens.

IDR appreciation could also hit DPU. We note that the IDR continues to show strength in 4Q09 and is roughly 5% stronger than the hedged rate disclosed in the IPO prospectus. This unfavorable gap between the hedged rate on distributions and the physical rate will further weigh on 4Q09 distributions as LMIR may book another realized forex loss. Our 4Q DPU estimate of 1.16 S cents, a 5% QoQ decline, is based on a rate of 6900 IDR/SGD. If the IDR stays below these levels, a larger than estimated DPU decline is possible.

Staying cautious in 2010. We have always liked the LMIR portfolio and the medium-term Indonesia retail story. However, the near-term retail outlook looks to be in doubt. The retail property sector remains soft and we believe rents and occupancy may continue to languish in the year ahead. Realized forex losses may act as an additional drag on DPU. If regional economy risks are heightened, investor sentiment could be further subdued. With near-term catalysts continuing to look anemic, we maintain our HOLD rating on LMIR Trust with S$0.48 fair value estimate.