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.

DPU falls QoQ on realized forex losses

DPU falls on realized forex losses. LMIR Trust reported 5% QoQ gains in 3Q revenue and net property income to S$20.6m and S$19.4m respectively. Distributed income, however, fell 6% QoQ to S$13.1m or 1.22 S cents per unit. Revenue and NPI were in line but DPU was below our expectations. 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. Consequently, LMIR booked a realized (cash) forex loss this quarter of S$0.4m versus a gain of S$1.2m in 2Q09. This pushed distributed income down despite a roughly 3% (our estimate) increase in revenue and NPI in IDR terms.

Rimo exit hits occupancy… A QoQ pick-up in casual leasing was partially offset by an anchor tenant’s exit from two LMIR malls. Rimo department store was occupying about 4,000 sq m in Istana Plaza (IP) and about 3,250 sq m in Gajah Madah Plaza (GMP). As a result, occupancy as at 30th September fell 8.5 percentage points to 89.8% at GMP and fell 15.4 percentage points to 80.1% at IP. Despite this gap, overall retail mall occupancy of 93% continued to outperform the industry average of 83% (Cushman & Wakefield).

… Adversely affects 4Q. The vacant space at both malls is being taken over by LMIR’s sister company and key tenant Matahari Department Store but the fitting out process takes time. With the timing gap between Rimo’s exit and Matahari’s official opening in December, the manager guided that 4Q09 revenue is likely to be adversely affected by the loss of income from Rimo. The unfavorable gap between the hedged rate on distributions and the physical rate could further weigh on 4Q09 distributions. Note the manager is guiding for roughly 99% occupancy at GMP and IP once Matahari opens.

Re-assessing call. We now estimate a 5% QoQ decline in 4Q DPU to 1.16 S cents. While we still like the LMIR portfolio and the medium-term Indonesia retail story, the 2H recovery we had hoped for is not taking shape as planned. The retail property sector also remains soft and we believe rents and occupancy may take longer to recover than we had previously anticipated. Realized forex losses may act as an additional drag. Yields are compelling but we think this is a good time for a breather as near-term catalysts appear anemic. Downgrade to HOLD with revised fair value of S$0.48 (prev: S$0.51).

Highlights from malls visit

‘Tis the season to spend. We visited seven of LMIR Trust’s retail malls in Greater Jakarta and Bandung earlier this week and found a healthy, vibrant portfolio carrying on despite a weak retail sector. Both LMIR and retailers are gearing up for a seasonal up-tick in spending during the Ramadan fasting month. Spending typically spikes two weeks before Idul Fitri, when Indonesian companies pay out a mandatory employee bonus of one-month salary (Tunjangan Hari Raya). The manager also seemed optimistic about the Christmas spending season. Our 2H09 DPU estimate is 2.75 S cents, up 3.4% HoH.

Casual leasing back in play. A tight retailer budget for advertising & promotions activities had dampened casual leasing demand in 1H09. Such prudence was very much lacking during our visit. The overwhelming majority of the malls’ atriums and corridors were well populated with island kiosks, exhibitions and sales as retailers positioned themselves for the festive season. Operational control has also tightened with LMIR dealing directly with casual tenants or demanding up-front payments from wholesalers.

Tenant turnover is painful. Some retailers including three anchor tenants that we know of have vacated or downsized space at the malls. The market remains soft with retailers hesitant to invest in new stores. LMIR’s portfolio occupancy is above-market and, in our opinion, the manager has done a credible job in re-populating the space. Still, the turnover process (offer, lease negotiation, fit-out) takes time, affecting occupancy and revenue during the transition. Just fitting out a large anchor tenant can take three to four months. We noticed that the manager is using temporary leasing to support the rent gap between tenants now that A&P demand has picked up. In fact, we found retailers such as BreadTalk; Times bookstore; and Matahari eager to capitalize on the season by utilizing casual leasing while their units get fitted out.

Still compelling. We understand the malls that were part of the acquisition pipeline at IPO have completed works but occupancy levels have yet to stabilize. The manager had earlier guided that the timing or size of any acquisition would depend on availability of funding. In our view, any acquisition scenario is more realistic on a six to 12 months time horizon. If the manager employs SGD-denominated debt, we believe the likelihood of a concurrent equity issue increases due to cautious lender sentiment. Slight variance in estimates edges our fair value estimate up to S$0.51 (prev: S$0.50). Maintain BUY (16% total return).

Retail outlook still weak but we see value

Distributable income falls YoY and QoQ. LMIR Trust reported a 20.3% YoY fall in 2Q09 revenue to S$19.5m and a 20.6% YoY fall in net property income to S$18.5m. The manager said about half of the decline was due to the depreciation of the IDR against the SGD. The rest was attributed to a reduction in casual leasing income as well as lower car park and miscellaneous income. Conversely, revenue and NPI rose 4.7% QoQ and 5.5% QoQ respectively thanks to the appreciation of the IDR in the past three months. The positive forex effect offset lower revenue from two of LMIR’s malls undergoing asset enhancement work. Distributable income, which is hedged, fell 12.5% YoY and 4.3% QoQ to S$13.9m. Unitholders will receive 1.3 S cents per unit, in line with our expectations.

Occupancy looks to be stabilizing. Mall occupancy was stable at 95% compared to three months ago, and outperformed the broader market rate of 84% (Jakarta only, Cushman & Wakefield). Mal Lippo Cikarang’s 86.5% occupancy is the lowest within the portfolio due to the non-renewal of anchor space. The manager has temporarily leased the space to factory outlets but is in discussions to secure longer term leases. We understand rent reversions are on average 3-5% above preceding rents. The manager has tried to offset any weakness in rents with shorter lease durations or by incorporating a step-up component.

Retail outlook still weak. Macroeconomic news on Indonesia has generally been quite benign. Low inflation and signs of political stability have boosted consumer confidence. The IMF forecasts growth of 3.5% this year, the fastest pace in Asia after India and China. However, the retail property sector is still plagued by weak demand and oversupply, particularly in Jakarta’s CBD. The manager guided that rental rates could remain soft in 2H09 but expected LMIR’s ‘middle market’ malls to show some resiliency.

But value exists. We have updated our earning estimates to reflect actual 1H performance. We are expecting portfolio performance to stabilize in 2H09, with a slight uplift from completed AEI projects. Our 2H09 DPU estimate is 2.76 S cents, up 3.9% HoH. We have also adjusted our valuation parameters to reflect current market and forex conditions. Our fair value estimate of S$0.50 (prev: S$0.24) is at a 25% discount to our SOTP value of S$0.67 for the trust. Despite the weak near-term retail outlook, we think LMIR presents value in the medium-term. Upgrade to BUY (total return of 22%).

LMIR Trust income dips despite stable rents

It cites depreciation of rupiah, drop in casual leasing and other income

LIPPO-MAPLETREE Indonesia Retail Trust (LMIR Trust) yesterday reported a 12.5 per cent year-on-year drop in distributable income to $13.9 million, for its second quarter.

Distribution per unit also fell to 1.3 cents for the quarter ended June 30, from 1.5 cents for last year’s Q2.

Gross revenue fell 20.3 per cent to $19.5 million. Reasons include the depreciation of the Indonesian rupiah, reduced casual leasing income, and lower car park and miscellaneous income as retailers cut back on publicity expenses such as signage fees, the trust’s manager said.

Property expenses dropped 14.3 per cent to $1.1 million.

Net property income fell 20.6 per cent to $18.5 million from $23.3 million one year back.

LMIR Trust’s property portfolio currently consists of eight retail malls and seven retail spaces located within other retail malls, all in Indonesia.

Its portfolio occupancy rate held steady at 95 per cent in the second quarter, ‘significantly better than the industry average’, the trust’s manager said.

In Q2, average monthly gross rents remained stable in Jakarta, where most of LMIR Trust’s portfolio properties are situated.

Some new properties, now under construction and expected to come onto the market in the coming year, could keep rental rates soft for the rest of this year, but will most likely affect the upper category of retail malls.

LMIR Trust’s management said that ‘the middle target market for its malls and their choice locations will allow its portfolio to be resilient, particularly in light of Indonesia’s economic outlook’.

Its gearing as at June 30 was 12.1 per cent, with total borrowings of $125 million for a tenure of four years from March 31.

LMIR Trust’s unit price closed one cent up, at 44 cents yesterday.