Category: LMIR
REITs – OCBC
Perceived risk will drive performance
The growth story is unwinding. Since its establishment in 2002, the SREIT sector has flown on the back of a soaring property market. Portfolio sizes expanded on the back of acquisitions and revaluation gains. Unit prices had also followed suit. The REITs behaved like growth instruments – the focus was on capital appreciation, not yield. This golden era ended quite decidedly this year. The growth story, built on a bull market (rising asset prices) and a cheap market (easy credit), has seen a massive reversal. No thanks to a collapse in unit prices, the sector is now trading at an average 20% trailing yield and a 63% discount to book.
Perceived risk new driver. We believe the sector’s performance will be driven by perceived risk, as measured by the strength of their balance sheets and the quality of their underlying income. Based on reported data, some S$4.4b of debt is due for refinancing in the next nine months until September 2009. Refinancing poses a major challenge for the sector, especially with securitized financing no longer in play and lenders mindful of loan-to-value in a falling market. We feel revaluation losses have a high probability of breaching self-imposed and lender-preferred gearing targets. An equity recapitalization may be necessary. In the midst of such uncertainty, we believe sponsored REITs are likely to show outperformance. On the income side, earnings and distributions are threatened by a rising cost of capital and potential rental declines. Our view is that REITs may benefit from diversification, but will have to watch out for forex-driven revaluation risk.
Recommendations. We have a NEUTRAL rating on the sector. We generally think S-REITs are oversold. As capital appreciation-seekers abandon the sector en masse, we see a new ‘REIT as value’ story emerging. While we expect share price volatility to continue for these institutional favorites, value hunters have an opportunity to selectively pick up some good assets at what we think are really good valuations. We expect substantial declines in capital values and rentals in the office sector – but to a large extent unit prices already reflect these concerns. The impact of global events on the retail and industrial sectors has been slower to register in market consciousness. The industrial sector is quite leveraged as a whole and it may be too early to make the call that risks are fully priced in. Within our coverage universe, we have BUY ratings on Suntec REIT (fair value: S$0.90), CapitaMall Trust (fair value: S$1.94) and LMIR Trust (fair value: S$0.39).
LMIR – OCBC
Pays out 1.6 S cents for 3Q
Pays out 1.6 S cents. Lippo-Mapletree Indonesia Retail Trust (LMIR) posted S$26.6m in gross revenue in 3Q08, up 8.4% QoQ. Revenue was also 27% higher than guided at LMIR’s IPO last year; primarily due to contributions from post-IPO acquisition Sun Plaza. LMIR’s net property income of S$25m was also 27% higher than the trust’s guidance. However, 3Q profit after tax of S$6.6m was 55% lower than guided because of unrealized losses on both foreign exchange forward contracts and interest rate swaps. Distributable income was up 7% QoQ and 11% higher than LMIR’s guidance. The results were generally in line with our expectations. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. The trust will pay out 1.6 S cents for the quarter (35% annualized yield).
Share price down 69%. Since our last report in July, LMIR’s share price has fallen 69% to 18.5 S cents. In contrast, the FTSE S-REIT index has fallen about 50% over the same period. Current price levels also mark a 77% decline from LMIR’s 80 S cents IPO price (November 2007). We think the biggest factor behind the decline has been currency movements against a backdrop of extreme risk aversion. The Indonesian Rupiah (IDR) has devalued about 12% against the Singapore dollar since January, with the biggest spike in the past month itself. Meanwhile, forward rates (Bloomberg) are pricing in exchange rates not seen since the Asian Financial Crisis.
DPU protected, but not NAV. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense (debt is SGD-denominated). While SGD-IDR volatility will not threaten investor income, it could affect NAV. LMIR is currently trading at a very low P/Book ratio of 0.2x (based on historical values), but these asset values do not reflect current exchange rates. Investors could see asset values falling in SGD terms and this may also affect gearing levels.
Maintain BUY. We have tried to incorporate these concerns into our valuation. At the same time, we think the retail story in Indonesia is still compelling. The country’s domestic economy has been relatively insulated from recent troubles, especially as the threat of inflation subsides. We take a more cautious view on our assumptions on rental growth, discount rate, and cap rates. Our new fair value estimate is 27 S cents (previously 70 S cents). Maintain BUY.
LMIR – OCBC
Back on track in second quarter
Outperforms IPO guidance this time. Lippo-Mapletree Indonesia Retail Trust (LMIR) had a relatively smoother ride over 2Q08 – it posted S$24.5m in gross revenue, 15% higher than the trust had guided during its November 2007 IPO. This was a welcome change from the previous period, when it had missed its own guidance by 5.11%. The trust will pay out 1.5 S cents per unit for the quarter, 3% above guidance. On a normalized QoQ basis, DPU is almost unchanged as the trust had been able to cushion the last period’s revenue shortfall with some one-time gains.
Sun Plaza booster, rest on track. Earnings were primarily boosted by Sun Plaza, which was acquired on 31 March. The retail mall in Medan, LMIR’s first (partially) debt-funded buy, increased the trust’s total portfolio NLA by almost 20%. Management disclosed that the portfolio ex-Sun Plaza performed as per LMIR’s guidance – contributing about 1.46 S cents of the 1.50 S cents DPU. Management also told us that rent reversions have been in line with LMIR’s assumptions at its IPO – the trust is seeing reversionary growth of about 10% per annum. Occupancy rates are also increasing as expected except for dark horse Bandung Indah where occupancy shot up to 97.4% as of 30 June from 89.3% on 31 March.
Asset enhancement plans. Macro-level uncertainties have led LMIR to re-assess its acquisition plans and we continue to expect a more conservative pace than what was indicated at its IPO. In any case, our valuation has always been based on the existing portfolio alone. In the meantime, the trust plans to roll out asset enhancement initiatives worth about S$3m at the trust’s Istana Plaza and Mal Lippo Cikarang malls that will increase the malls’ NLA by 2.4% and 17.3%, respectively.
Revise up DPU estimate, maintain BUY. We have tweaked our occupancy and rent assumptions, increasing our DPU estimates by about 4%1. Meanwhile, LMIR has appreciated over 9% since our last report in June. Our view on the trust is unchanged – the oft-discussed macroeconomic risks are balanced by the opportunities inherent in Indonesia’s retail sector. And while market conditions have currently reined in the trust’s acquisition plans, its low 10.2% gearing and strong acquisition pipeline gives it headroom for growth as credit conditions improve. LMIR’s 10.1% FY08F distribution yield (annualized) is an attractive entry point for investors, in our view – maintain BUY and S$0.70 fair value estimate.
LMIR – BT
LMIR Trust beats forecast with $16m Q2 distributable income
Contribution from Sun Plaza boosts results; it is upbeat about prospects
LIPPO-MAPLETREE Indonesia Retail Trust (LMIR Trust) yesterday said that its second-quarter distributable income came to $15.9 million – 3 per cent higher than the $15.4 million forecasted.
Distribution per unit (DPU) for the three months ended June 30, 2008, was 1.50 cents, also 3 per cent higher than the forecast DPU of 1.45 cents.
Net property income for Q208 was $23.3 million, 17 per cent higher than the forecast of $19.9 million.
There is no comparable period for 2007 as LMIR Trust was only listed on the Singapore Exchange in November last year.
LMIR Trust invests in Indonesian retail assets. Its current $1.2-billion portfolio consists of eight retail malls and seven retail spaces located within other retail malls.
The trust’s financial performance was boosted by contribution from its Sun Plaza mall, which was acquired in March this year. The $147-million acquisition increased LMIR Trust’s total portfolio net lettable area by about 20 per cent to 4.1 million sq ft.
For the trust’s 2008 financial year-to-date – which spans from Aug 8, 2007 to June 30, 2008 and covers both its time as a private trust and as a listed entity – distributable income was $39.3 million, while DPU was 3.7 cents – both 3 per cent higher than the forecasts.
The trust is upbeat about its future prospects and the continued growth prospects for the Indonesian economy, which have stood up well despite rising inflation and interest rates, said Viven G Sitiabudi, chief executive officer of the trust’s management team. ‘LMIR Trust’s malls are defensive in nature, as they are located in high catchment middle to upper-middle income residential areas where the inflation effect is moderate,’ she noted.
The trust is planning asset-enhancement initiatives at two of its malls – Istana Plaza in Bandung and Mal Lippo Cikarang in Greater Jakarta. Some $3 million will be spent in total on both malls to boost traffic and rental income.
The stock gained 0.5 cents to close at 59 cents yesterday. LMIR Trust has shed 11.3 per cent since the start of the year.
LMIR – OCBC
Data points reiterate our investment case
Riding the global slump. Indonesia has received a lot of bad press lately but consensus real GDP growth estimates are still high, ranging between 5.5% and 6% for 2008. This is only marginally lower than the 6.32% growth recorded in 2007, and on par with the growth seen in 2005 and 2006. We believe the investment case for LMIR is still intact. Its portfolio of eight retail malls and seven retail strata spaces is strategically located across Indonesia and boasts strong tenancy profiles with large anchor tenants like hypermarkets. We note that retail sales have historically outperformed GDP growth, averaging a growth of 11% per year since 1998 (Jones Lang LaSalle).
Occupancy is up. LMIR posted S$29.3m in total revenue over 19 Nov 2007 to 31 Mar 2008, missing its IPO forecasts by 5.11%. The REIT had said in April that the variance was due to “reduced rentals” meant to attract traffic driving tenants at four of its retail malls post asset enhancement work. LMIR also said that the variance to prospectus forecasts would be “mitigated in the coming months”. Since then, LMIR has released the occupancy profile of the seven of its eight retail malls owned as of 31 March 2008. Portfolio occupancy had already improved to 95.6% at 31 March from 92.8% at December 2007, which should be reflected in 2Q results.
Focused on improving performance. LMIR continues to focus on improving tenancy mix and occupancy rates. The new Medan mall, which enjoyed 97% occupancy as at April 2008, will also begin contributing to revenue from this quarter onwards. LMIR has also rolled out asset enhancement initiatives worth S$3.3m at its Istana Plaza and Mal Lippo Cikarang malls that will increase the malls’ NLA by 1.7% and 17% respectively. We do expect macro-level uncertainties to slow down LMIR’s acquisition pace versus what was indicated at its IPO. In any case, our
valuation is based solely on the existing portfolio.
We reiterate our BUY rating on LMIR. We expect compelling distribution yields of 10.7% in 2008 and 11% in 2009. The continued volatility of the SGD-IDR exchange rate should be of limited concern to LMIR investors as the trust has hedged both its SGD-denominated distributions and interest expense. While SGD-IDR volatility will not threaten investor income, it could affect NAV as asset values would fall in SGD terms. Our fair value estimate of S$0.70 takes these factors into account.