LMIR – OCBC

FY10 results mostly in line; Maintain BUY

4Q DPU of 1.11 S-cents. LMIR Trust (LMIR) reported 4Q10 gross revenue of S$19.3m, up 41.6% YoY but down 4.7% QoQ. Distributable income however dropped 3.3% YoY but rose 2.5% QoQ to S$12.1m. For FY10, gross revenue jumped 50.9% to S$129.4m, which was in line with our projection of S$130m and market expectation of S$131m (based on consensus estimate from Bloomberg). Distributable income, however, slipped 11.4% to S$47.8m, partly due to higher operating expenses subsequent to the expiry of the Operating Costs Agreements with third party operators (Opcos) on 31 Dec 2009. Previously, Opcos were given rights to the service charges receipt and utilities cost recovery from tenants, whilst responsible for the costs directly related to the maintenance and operation of seven malls. The operating costs have since been passed on directly to the REIT in FY10. 4Q DPU is 1.11 S-cents (also in line with our forecast of 1.15 S-cents), representing an annualized yield of 8.16%, based on yesterday’s closing price of S$0.54. This was 4.1% lower than the 1.16 S-cents paid out in 4Q09.

Portfolio Performance. Overall portfolio occupancy increases 1.4 pp YoY to 98.3%; this compares well against Jakarta’s average occupancy rate of 86.3%. LMIR also benefited from positive rental reversion with renewed leases contracted at 10% higher on average than the ones that have expired during the year. LMIR continues to have a well-diversified portfolio, with no particular trade sector accounting for more than 17% of total net leasable area (NLA), and no single property accounting for more than 18% of total net property income (NPI). We also noted that LMIR’s gearing ratio of 10.3% is relatively low, compared to other retail REITs. This places it in a favorable position to use debt financing to embark on inorganic growth in FY2011. On the organic-growth front, we also understand that LMIR is exploring asset enhancement opportunities at some of its existing malls.

Positive Outlook. Management guided that the Indonesian economy is projected to remain buoyant1 , which will benefit the retail industry. Retail leasing has started to pick up in 3Q10, with a large number of leases recorded and several notable deals witnessed in newly completed projects. Foreign major retailers were also increasingly active in the market, with expansion plans in response to market opportunities. Furthermore, as new supply is expected to grow moderately in 2011, nationwide vacancy is anticipated to stabilize at around 13.3% by end of 2011. Such a trend helps the market to maintain stable occupancy and record good rental reversions going forward. Our investment thesis for LMIR remains intact, supported by Indonesia’s growth story and LMIR’s quality assets. Maintain BUY with an unchanged fair value of S$0.592.

1 The World Bank has forecasted Indonesia’s GDP to grow at 6.2% and 6.3% in 2011 and 2012 respectively. IMF has also projected Indonesia’s GDP growth at 6.2% and 6.5% in 2011 and 2012 respectively.

2 Key risks to our rating include reversal of recovery trends for the Indonesian economy, forex risk and deterioration in credit and capital markets.