Favorable retail outlook ahead; reiterate BUY

Retail supply. According to Colliers International, no new retail supply entered the market in 4Q10. Retail supply growth throughout 2010 in Jakarta and the greater Jakarta area was the lowest since 2009. With only 0.3% growth, YoY growth was 0.2pp below last year. Limited supply will continue throughout this year. In Jakarta, there will be an additional 89,000 sqm of retail space by the end of 2011 contributed mainly by Kuningan City Lifestyle and Entertainment. Colliers expects another 439,3556 sqm of retail space within the next three years and all of these projected developments are a component within mixed-use developments. Retail supply around Greater Jakarta is projected to be far less than in Jakarta. The limited supply puts LMIR in a good stead to capitalize on growth opportunities arising from the robust economy recovery (Indonesia’s economic growth forecast is 6.9-7.0% for 2011)

Occupancy rates & tenants. Up to the end of 1Q11, the occupancy rate of shopping malls in Jakarta was 85.04%, up 1.77% QoQ. We noted that occupancy rates have been steadily increasing for all regions of Jakarta since 2010. The average occupancy performance around the greater Jakarta area was also relatively stable, with occupancy standing at 82.9%. LMIR’s overall occupancy of 98% as at 31 Mar, compared favorably against these benchmarks. The emerging concept in Indonesia of combining department stores with F&B outlets further boosted shopper traffic and uplifted tenants’ performance. Some of the familiar tenants taking up new leases in Jakarta this year include Mad for Garlic, Marche, Muji, Yamaha Music School, Best Denki etc. In terms of the entry of new tenants, Payless Shoes, a shoe retailer from Kansas of the United States, also opened its first outlet in Indonesia. A giant retailer from Germany, Metro Group, also announced that it plans to invest as much as €300m in the next three years to establish 20 wholesale retail outlets in Indonesia.

Rental rates in Jakarta. There was no increase in rental rate in 1Q11. Strengthening occupancy performance has become more important for shopping malls at present. Retaining existing tenants by providing rents according to the lease agreement and offering reasonable rates for new tenants are common. In 1Q11, the average rental rate was recorded at Rp349,507 psm/mth. Despite showing no increase QoQ, the average rental rate was 1.16% higher YoY. With a population of more than 200 million, a fast-growing economy and strong domestic consumption, Indonesia offers abundant potential for retail business. Likewise for retail landlords, who are expecting rentals to pick up in 2012-2013. We believe LMIR is poised to benefit from the rising mall culture in Indonesia. Reiterate BUY with an increased fair value of S$0.61 (prev: S$0.59).on grounds of favorable outlook ahead.

1Q11 results mostly in line; Riding on Indonesia’s economic growth

1Q DPU of 1.17 S-cents. LMIR Trust (LMIR) reported 1Q11 gross revenue of S$32.8m, up 40.8% YoY and 1.9% QoQ, which was also in line with our expectation and street estimates. The yearly increase was largely due to the (1) additional income derived from the service charges receipt and utilities cost recovery from tenants at seven of its malls and (2) positive rental reversion of renewed leases. NPI rose 9.9% YoY and 6.1% QoQ to S$22.4m. Distributable income, however, dropped 1.6% YoY but rose 5.3% QoQ to S$12.7m. The yearly decline was partially the result of an increase in realized loss on foreign exchange forward contracts of S$2.1m as the cross currency swap remained “out of the money”, compared to $1.7m in 1Q 2010. 1Q11 DPU is 1.17 S-cents (also in line with our forecast of 1.14 S-cents) compared to 1.11 S-cents in 4Q10 and 1.20 S-cents in 1Q10. On an annualized basis, this represents a yield of 8.5% based on yesterday’s close of S$0.555. As at 31 Mar 2011, LMIR’s gearing remained flat QoQ at 10%, with total borrowings stable at S$125m.

Portfolio Performance. Overall portfolio occupancy dipped from 98.3% the previous quarter to 98%. We note that the occupancy for Plaza Semanggi declined 3.4pp to 93.7%, possibly due to non-renewal of tenants. Nonetheless, this compares well against Jakarta’s average occupancy rate of 86.3%. LMIR also benefited from positive rental reversion with renewed leases contracted at 9% higher on average than the ones that have expired during the quarter. LMIR continues to have a well-diversified portfolio, with no particular trade sector accounting for more than 25% of total net leasable area (NLA), and no single property accounting for more than 16% of total net property income (NPI). We continue to like LMIR’s market positioning. The main shopper traffic at its retail malls and spaces comprises urban middle-income to upper middleincome consumers, whilst its malls are deemed as “everyday malls” for daily essentials, food outlets and family entertainment.

Supported by Indonesia’s Growth Story. Management guided that Indonesia’s retail sales are expected to rise by 20% to S$13.8b in 2011, due to the growing number of retail outlets and strong domestic demand. With Indonesia’s continued economic growth, rising middle class income and greater spending power, we believe LMIR is poised to benefit from the growth of the mall culture in Indonesia. Reiterate BUY with an unchanged fair value of S$0.59 (total returns of 14.7%). Further increase in fair value, in our view, would stem from the manager announcing further acquisitions or development projects.

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.

3Q10 in line; investment case still compelling

3Q10 in line. LMIR Trust (LMIR) reported 53% YoY gains in 3Q revenue to S$33.8m, thanks to the collection of additional income from services charges receipt / utilities cost recovery on seven retail malls with the 31 Dec expiry of an operating costs agreement in place at listing. This income was offset by the additional costs incurred relating to the maintenance and operation of the malls. Revenue fell 15.9% QoQ but recall that 2Q10 results had reflected the full six months effect for 1H10 due to a delay in the transfer of operations. Net property income of S$22.2m was up 14.5% YoY and 2.7% QoQ, boosted by the strong Indonesian Rupiah (IDR) against the Singapore Dollar (SGD).

DPU of 1.09 S cents. DPU fell 10.7% YoY but gained 4.8% QoQ to 1.09 S cents. The manager attributed this to the appreciation in the IDR, which has caused the gap between the hedged rate on distributions and the physical rate to reverse unfavorably in the last five quarters. LMIR booked a realized (cash) forex loss this quarter of S$2.9m versus a loss of S$2.4m in 2Q10 and a loss of S$0.4m in 3Q09. DPU was just 2.8% ahead of our 1.06 S cents estimate.

Portfolio performance stable. Occupancy at LMIR’s retail malls ticked up 70 basis points from 97.1% at 30 Jun to 98.1% at 30 Sep. This compares favorably to the Jakarta average occupancy of 84.5% (ex strata-title malls) as of Sep 20101 . We note that while some new supply is coming up in the region, the manager was unperturbed due to location and/or positioning factors. It also cited an environment of increasing confidence, with more retailers exploring expansion options. We understand LMIR is also exploring asset enhancement opportunities at some of its existing malls.

Valuation. LMIR is up 9.1% since our last report on 30 Jul. We have revised our earnings estimates upwards marginally. At the same time, we have relaxed our discount rate inputs to better reflect improved market conditions. These factors push our fair value estimate up from S$0.52 to S$0.60 (still at a 20% discount to our SOTP value for LMIR). The investment case for LMIR remains compelling, in our opinion, considering the Indonesia consumption story; LMIR’s defensive portfolio; and the potential for growth on the back of its strong balance sheet (10.8% leverage) and attractive sponsor / third-party pipelines. With 19% estimated total return, maintain BUY.

DPU disappoints on higher tax expenses

NPI in line. LMIR Trust (LMIR) reported 92% YoY and 72.5% QoQ gains in 2Q revenue to S$40.1m, this as LMIR collected additional income from services charges receipt and utilities cost recovery on seven of its retail malls with the 31 Dec expiry of the operating costs agreement in place at listing. That additional income was offset by the additional costs incurred, relating to the maintenance and operation of the malls. 2Q10 reflects the full six months effect for 1H10 due to a delay in the transfer of operations. Net property income of S$21.6m was up 17% YoY and 6% QoQ, boosted by the strong Indonesian Rupiah (IDR) against the Singapore Dollar (SGD). NPI was in line with our S$21.6m estimate in both SGD and IDR terms. Retail mall occupancy improved 360 bps to 97.4% from three months ago; this is significantly higher than the market average of 82.7%. LMIR is leveraged at 10.3% debtto-assets as of 30 Jun.

But DPU disappoints on tax. 2Q10 DPU fell 20% YoY and 13% QoQ to 1.04 S cents. The manager attributed this to the appreciation in the IDR, which has caused the gap between the hedged rate on distributions and the physical rate to reverse unfavorably in the last four quarters. LMIR booked a realized (cash) forex loss this quarter of S$2.4m versus a loss of S$1.7m in 1Q10 and a realized gain of S$1.2m in 2Q09. This is likely to be a continuing issue as we estimate 3Q’s hedged rate is roughly 15% higher (unfavorably) than current levels. While we had expected the forex impact, DPU was 14% below our 1.21 S cents estimate due to actual tax expense of S$5.5m versus our S$3.6m estimate. The manager explained that it is now incurring revenue tax on the additional service charge and utilities income. It is exploring options to increase tax, and also operational, efficiencies.

Valuation. We have adjusted our earnings estimates to reflect the additional service charge and utilities income and additional operating expenses; we also incorporate actual 1H10 results. Additionally, we have adjusted our tax estimates upwards. On the plus side, we have increased our occupancy estimates. Our FY10-11F DPU estimates fall 11.5% and 12.6% to 4.4 S cents and 4.5 S cents. Finally, our fair value estimate (at an unchanged 20% discount to SOTP value) falls to S$0.52 from S$0.55 previously. With an estimated total return of 14%, maintain BUY on valuation grounds.