Prime Orchard Landlord

Story: MP Reit announced their 2Q08 in line with expectations. Gross revenues grew 27.8% yoy to S$30.2m while NPI increased 29.2% yoy to S$23.1m. Distributable income came in 18.7% higher yoy at $33.3m, resulting in a DPU of 1.78 cts.

Balance sheet remains strong with a gearing ratio of 28.9%as at 30 Jun 08 and interest cover of 4.8x. Interest costs remain relatively low at 2.76%. In the near term, MP Reit is in the process of renewing c$220m of expiring debt.

Point: Performance was largely organic in nature arising from higher rental reversions and contributions from its overseas properties despite some disruptions at their Chengdu asset resulting from the earthquake. Moving forward, DPU growth is likely to grow even stronger with (i) rental reversions from another 13% of portfolio NLA up for renewal in FY08, 15% in FY09, (ii) impact of 19.75% increase in rent from Toshin lease, and (iii) AEI activities done on Ngee Ann City will start contributing in 2H08. Key data points to look out for in the near term will be the outcome of the strategic review which management of MP Reit has yet to conclude.

Relevance: Maintain BUY, TP adjusted to $1.39 from $1.61. We have adjusted our DCF valuation downwards to take into account a higher risk free rate of 3.9% and a lower terminal growth of 1%. At current price, MP Reit is trading at an attractive 0.7x P/BV, backed by quality assets and offers a FY08-09 DPU yield of 7.0% and 7.2% respectively.

MP Reit raises rent by 19.75% at Ngee Ann City

Rent hike for 226,000 sq ft prompts DBS Vickers to raise DPU estimates

MACQUARIE Prime Real Estate Investment Trust (MP Reit) said yesterday that it has raised rent by 19.75 per cent for about 226,000 square feet of retail space in Ngee Ann City.

The Orchard Road space, of which Toshin Development is master lessee, is occupied by luxury retailers such as Louis Vuitton and Chanel, as well as brand name retailers.

MP Reit – formerly known as Macquarie MEAG Prime Reit (MMP Reit) – said that this is expected to push annualised DPU (distribution per unit) up by 7.2 per cent, based on an annualised DPU of 7.08 cents for the first quarter of 2008.

The rental increase for a period of three years starting on June 8 came after a review with Toshin, which is wholly owned by departmental store operator Takashimaya.

‘The announcement is above our estimates of 15 per cent and is largely positive for the Reit given its positive impact on earnings,’ DBS Vickers said in a research note.

The broking house raised its DPU estimates to 7.54 cents for the financial year 2008, translating to a DPU yield of about 6.7 per cent based on yesterday’s closing price of $1.13.

DBS Vickers also upped its DPU estimates for financial year 2009 to 7.81 cents.

The lease under Toshin contributed to a quarter of the Reit’s portfolio gross rent, as at end-March this year.

But the broking house lowered its target price to $1.61 from $1.63 to account for ‘a higher risk-free rate of 3.9 per cent against (its) previous estimate of 3 per cent’.

MP Reit holds a 27.23 per cent strata title interest in Ngee Ann City, comprising 256,000 sq ft in retail net lettable area and 141,000 sq ft in office net lettable space.

The 30,000 square feet of retail area that is not covered by the Toshin master lease is directly rented out and managed by the Reit.

MP Reit’s portfolio consists of 10 properties that are worth more than $2 billion.

Minor disruption from earthquake in Central China

Minor disruption from earthquake in Central China. MMP REIT owns Renhe Spring Department Store located in Chengdu, the capital city of Sichuan Province. The mall experienced tremors and aftershocks during the recent earthquake. The building was successfully evacuated. Preliminary assessment indicates no major damages for the new five years old building. The company has engaged structural engineers to conduct a detailed inspection. The mall will be open for business once MMP REIT secures clearance from the local authorities.

The earthquake is unlikely to have a material impact on financial performance in FY08 due to profit guarantee from Renhe Spring Group. Renhe Spring Departmental Store contributed 11% of total revenue in 1Q08.

Renhe Spring Department Store. The acquisition of Renhe Spring Department Store for Rmb350m, or S$70m was completed in Aug 07. The mall houses premium foreign brands such as Burberry, Prada, Dunhill, Ermenegildo Zegna, Gucci and Hugo Boss. The property achieved sales of Rmb263m in 2006, an increase of 23%. The mall will be linked to Chengdu’s new subway system in 2010. The vendor Renhe Spring Group provided guaranteed net profit of Rmb26.4m for four years, equivalent to a net distribution yield of 7.5%.

Maintain BUY. MMP REIT provides FY08 distribution yield of 6.41%, an attractive spread of 4.06% over 10-year Singapore government bond yield at 2.35%. Our target price is S$1.55 based on two-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).

Evaluating proposals from strategic review

Received various proposals from third parties. Macquarie Pacific Star Prime REIT Management, manager of Macquarie MEAG Prime REIT (MMP REIT), has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The manager has received a number of indicative proposals from third parties and is in the process of reviewing these proposals. Macquarie Real Estate Singapore, the largest unitholder with a 26% stake in MMP REIT, continues to support the strategic review.

Reiterate BUY recommendation. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT benefits full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.08%. Our target price is S$1.55 based on two-stage dividend discount model.