MMP – OCBC

Finally delivers on acquisition promise

Flattish growth. Macquarie MEAG Prime REIT’s (MMP) 1Q06 came in within expectation. Top-line came in at S$23.4m, improving 3.5% QoQ, but Net Property Income (NPI) of S$17.3m (-0.4% QoQ) led to flat distributable income per unit (DPU) of 1.47 cents. The top-line benefited from positive rental reversion, while the lower NPI was attributed to higher property expenses (mainly depreciation) as the result of the installation of escalators linking Wisma Atria basement to Orchard road and higher cost for changing the tenancy mix.

Organic growth to come from office. MMP’s office space is presently under-rented with rents at about S$5psf/mth, whereas market rents are approaching the S$8-10psf/mth mark. More importantly, with 182,000 sq ft (about 70% of office space) of leases due for renewal over the next two years, we see a lot of upside potential.

Finally bought something but accretion marginal. On the acquisition front, MMP has been fairly disappointing since its IPO in 2005. However recently, it has made up for lost time by making two separate acquisitions in two different countries. One was in Tokyo (7 retail properties) for a total of S$182.5m, while the other was for a 50% stake in a Chengdu retail mall
for S$30m. Though in absolute terms these purchases are small and has no material impact on its asset size of S$1.5bn, it is nevertheless a step in the right direction. With gearing at only 26%, debt funding makes the most sense. We estimate that if the acquisitions were fully debt funded,
the full year DPU accretion is about 0.2 cents. As our FY07 and FY08 forecasts already contain growth assumptions, we will retain our numbers for now and will review them in 2H07. We also remain hopeful that more meaningful assets can be acquired.

Maintain BUY. MMP remains one of the very few REITs with a low price to book ratio. It is currently trading at about 1.1x P/B. This implies that market has not factored in growth and that upside surprise is possible if a meaningful acquisition is done. Finally with a DPU yield of about 5.0% and a capital value upside of about 6.5%, total return of over 10% is possible. We thus remain positive on MMP and see it as one of the lowest-risk REITs in the market. Maintain BUY with a fair value of S$1.32.