3Q06 Results

3Q06 results. MMP reported net property income of S$17.4 m, 4.0% higher than projected in IPO prospectus. The higher income was due to a 1.3% increase in gross revenue to $22.4m and a 7.0% decline in expenses. DPU of 1.44 cts per unit exceeds IPO projection by 9% but remained the same qoq. The ex-date of the distribution of 1.44 cents per unit is on 01 Nov 2006 and will be paid out on 29 Nov 2006.

MMP has expanded and re-organised its senior investment and asset management teams. During the last meeting with MMP’s management, we have voiced the concern of the lack of acquisitions. The reason given to us is the shortage of acquisition manpower. We believe that after this expansion and re-organization, MMP will become more geared toward acquisitions in a rapidly changing market. MMP has identified China, Japan, Malaysia and Singapore as tier one countries with strong potential for attractive acquisition opportunities.

Link closure impact. Business has been bad for Wisma Atria (WA) basement tenants since the linkway closure. WA charges basement tenants high rental rate of up to $50-65 psf due to high traffic flow from Orchard MRT. This contributes approximately 50% of WA’s total revenue. According to news, basement business has slipped by up to 40% due to the diversion. However, the actual figure of the impact will only be known by early Jan 07. The new escalators will be ready in Dec 2006.

Valuation and recommendation. We continue to assume a constant organic growth mainly coming from rental rates with no acquisitions in our DDM valuation, and incorporating a total of 79,000 sq ft of office lease renewal for FY07 with higher rates. Since 3Q06 results are still in line with our forecasted value, we are maintaining our valuation components. In our DDM valuation, we arrive at the fair value of S$0.96 for MMP. This translates to a 6.0% dividend yield and a price to net asset value of 1.0x for FY06. It represents an average spread of 2.8% as compared to the risk free rate of 3.2% (S’pore 10-year bond). We maintain a Hold due to MMP’s lack of acquisition growth. However, MMP is still suitable for investors looking for an attractive dividend yield of approximately 6.0%.

Extracts fm Nomura Report dated 6-Oct-06,

Inexpensive Prime property II

Revised NAV and DPU

• We lift our estimate of Macquarie Prime REIT’s (MMP) NAV to S$1.33/unit (previous: S$1.25/unit). Since 18.2% of Prime REIT’s gross asset value is in the office sector, our higher office rental assumptions bring relatively modest DPU upgrades.

Impact of new office rental assumptions

• We now project average market rents in Ngee Ann City office towers of S$7.05 psf pm in FY08F (previous: S$5.00).
  
• Our new assumptions see us valuing MMP’s office assets at an average value of S$1,059 psf.

Other changes in assumptions

• None.

Risk

• REITs remain susceptible to interest rate movements, which directly impact DPU (via interest expenses) and capitalisation rates (and thus underlying values).

Valuation & Rating

• While MMP’s exposure to the office sector is 18.2% of gross assets, we see two key positives. 1) The stock looks inexpensive — it is at a steep discount to our current SOTP NAV of S$1.33/unit, and the FY06F P/BV of 0.99x is below the average for domestic retail REIT peers (1.45x). 2) It looks to have an under-leveraged yield. The FY06F yield of 5.92% compares with the retail average of 4.70%, with the potential to make yield-accretive acquisitions, given the relatively low gearing (0.30x).
  
• MMP remains on our STRONG BUY list. Our revised fair value: S$1.33/unit.

CapitaLand explains closure of Orchard MRT-Wisma link

Developer CapitaLand has explained why it will go ahead with plans to close the Wisma link to the Orchard MRT at the end of this month.

Retailers at Ngee Ann City had appealed for the link to be closed only after Christmas, but CapitaLand said that any delay is costly and will affect the progress of construction works at Orchard Turn.

CapitaLand already has the green light from the Urban Redevelopment Authority to proceed with the development of the Orchard Turn site. The development will have eight storeys of shopping space, including basement levels. The developer says work will be extensive. Pua Seck Guan, CEO of CapitaMall Trust, said: "The link currently straddles between the Orchard MRT to Wisma, which is about 18 metres long and that is part of our land. And we have our space, we need to dig two more basements below the current link and then do a lot of retaining wall, piling. So it's a very extensive construction work."

The link between Wisma and Orchard MRT station will be closed for about two years while development takes place. Mr Pua said: "We target to complete this project by December 2008, which is a very aggressive timing. But it's doable. In that respect, we need to start the construction of this place very quickly. And we've got the approval from URA to close the deal."

CapitaLand has contracted the mixed commercial-residential project to Japanese construction firm, Penta-Ocean for some $480 million. Penta-Ocean helped built The Esplanade and it is building retail complex VivoCity which is slated to be opened by this October.

A major retailer with an outlet at the Wisma linkway estimates that it will lose up to 30 percent of sales revenue for each year that the tunnel is closed.

But CapitaLand says it too has an incentive to complete the project as soon as possible. Mr Pua said: "It's a very significant investment on our part. We paid $1.38 billion just for the land and with the construction cost, this project will cost us about $2 billion. Just interest alone will cost us at least $200,000 a day. So it's in our interest to finish the construction of this project quicker.

"Also, by appointing a contractor to do it on a design-and-build basis, we're able to shorten the construction period by paying a premium. Otherwise, a project of this size, I would think, would take easily 3 years to do it. It's also on our part to minimise the disruption to the MRT train station."

The retail portion of Orchard Turn is expected to be opened by December 2008, followed by the residential portion by end-2009.

The Orchard Turn site was awarded to the 50:50 consortium of CapitaLand and Hong Kong's Sun Hung Kai in December last year. - CNA/ir

Passage to be sealed to facilitate piling for Orchard Turn: sources

(SINGAPORE) The heat is on Wisma Atria and its 74-per-cent owner, listed Macquarie MEAG Prime Reit (MMP Reit). BT understands the mall next to Orchard MRT Station could soon lose - at least for a year or so - its default captive-shopper base from MRT commuters exiting Orchard MRT Station, who tend to flow into Wisma Atria's Basement 2 on the same level.

The reason: The CapitaLand and Sun Hung Kai Properties (SHKP) joint venture developing the Orchard Turn site will soon have to seal the crucial underground walkway between Orchard MRT Station and Wisma Atria at Basement 2, as piling begins for their new mall-and-apartment project that will go down to Basement 4 and rise 53 storeys above ground, BT understands.

The Basement 2 link between Orchard MRT and Wisma Atria is vital to attracting shoppers to the mall, many of whom then continue to walk along the passageway to Ngee Ann City next door. The impending closure is therefore expected to have negative implications for MMP Reit, which owns 74 per cent of Wisma Atria and 27 per cent of Ngee Ann City. 'The basement walkway between Orchard MRT Station and Wisma Atria is of critical importance,' said an analyst. 'If they shut down the walkway it will have a serious impact in terms of business for the shops there. Most of the shops in Wisma Atria's Basement 2 are paying gross monthly rents of $50-65 per square foot - among the highest in Singapore. 'This is likely to have an adverse impact on revenues that MMP Reit can collect from its tenants.'

The Basement 2 walkway between Orchard MRT Station and Wisma Atria, about 20 metres long, is currently lined with posters promoting shops there. A site visit by BT yesterday showed that at street level, hoarding has already gone up at the section of the site that adjoins Wisma Atria - signalling that construction work is imminent. These usually start with excavation and piling. An inspection of tender documents issued by Urban Redevelopment Authority for the Orchard Turn site shows the site's boundary abuts Wisma Atria and includes the passageway at Basement 2 that links the mall to the MRT station. The passage area used to belong to the state but was sold by URA as part of the Orchard Turn site clinched by CapitaLand-SHKP in a state tender in December last year.

Under the tender conditions, the joint-venture company, Orchard Turn Developments Pte Ltd, will have to ensure it continues to provide an exit for MRT commuters to Orchard Road during construction work. The existing street-level entrances to the MRT Station along Orchard Road and Orchard Boulevard will remain open. And the area at Basement 2 leading to the Orchard underpass and CK Tang, Shaw House and Wheelock Place will also remain open.

As the boundary of the Orchard Turn site abuts Wisma Atria and includes the link to the MRT station, and given the new project will have four basement levels, industry experts envisage that the Basement 2 link to Wisma Atria will likely soon have to be shut off by a diaphragm wall, one that will have to be built to enclose the entire section where piling works are to be carried out for the Orchard Turn project, BT understands. Piling could begin as soon as September or October to meet the stringent deadline for the Orchard Turn mall's opening by Christmas 2008, as previously announced.

Based on the extensive scope of works, industry observers reckon the Basement 2 link may be shut for at least a year. Indeed, the area around both Orchard and Somerset MRT stations will be abuzz with construction activity for the next three years. In the Somerset area, Far East Organization will redevelop the former Glutton's Square site it clinched at a state tender in January and in which OCBC, owner of the next-door Specialists' Shopping Centre, has taken a 10 per cent stake.

Specialists' Centre is also expected to be revamped - either a total redevelopment or a massive retrofitting. And next to it, the Somerset Central site tender which closed on Wednesday drew a top bid from Australia's Lend Lease group, which is planing an all-retail project.

Needs acquisitions to grow

Flat growth in 2Q06. Macquarie MEAG Prime REIT (MMP) reported its 2Q06 results with revenue and distributable income and distributable income per unit (DPU) not improving QoQ. Topline came in at S$22.4m, down by a slight 0.3% QoQ, with distributable income of S$13.6m (+0.1% QoQ). Distributable income per unit (DPU) was flat at 1.44 cents. MMP did not elaborate on the flattish growth, but this is likely due to the already fairly high rentals that it is getting especially from its retail space.

Organic growth likely to be moderate. Presently, MMP's properties are all well occupied with retail space fully occupied and office at over 92% taken up. In absolute terms, Wisma Atria's office space is at 93.9%, up from 92.4% in 1Q06, with Ngee Ann City's (NAC) office space presently at 95.2% (from 93.1% in 1Q06). However, with office recovery intact, we anticipate close to full occupancy by end 2006 or early 2007. However, on a portfolio basis, any revenue improvement from the office segment is not likely to be large. Further, with only about 9% and about 12% of portfolio space up for renewal in 2006 and 2007, respectively, future organic earnings growth is also not expected to be exciting.

Meaningful growth must come from acquisitions. As little growth can be expected from MMP's existing portfolio, meaningful earnings growth can only come from acquisitions. In that respect, MMP has been fairly disappointing with no news on that front so far. However, it does have a strategy to buy domestic as well as regional prime properties.

Maintain fair value at S$1.17 and BUY rating. MMP has been performing fairly poorly since its IPO, down by about 4% from its IPO price of S$0.98. However, it has faired relatively well compared to the recent selldown for other Singapore REITs. In terms of yield, at present trading range, MMP is very attractive at over 6.0%. But more importantly, with a price-to-book of around 0.94 times, this makes MMP one of the lowest-risk REITs with low expectation of growth. We see these traits as defensive and thus maintain our BUY rating and S$1.17 fair value.

One of the highest DPU yields in the market

Better than expected. Macquarie MEAG Prime REIT (MMP) reported its 1Q06 results with both revenue and distributable income better than forecast. Revenue came in at S$22.5m with distributable income (DPU) at 1.44 cents, 7% and 12% higher than MMP’s own IPO market forecasts. The good result is attributed to higher rentals achieved on renewals and new leases as well as lower operating and non operating costs.

Expect more moderate growth. Even though the current results are good, going forward organic growth is likely to be modest. MMP’s retail space remains fully occupied and at relatively high rates, so rental growth is likely to be more muted. On the other hand, MMP’s office space should see better growth prospects due to lower occupancy rate (Ngee Ann City at year-end stood at 94%). With office recovery intact, we anticipate close to full occupancy by end 2006 or early 2007. However, on a portfolio basis any revenue improvement from the office segment is not likely to be large. This is due to MMP’s smaller office net lettable area (NLA) relative to its retail components and much lower market office rental rates compared to retail rates.

Meaningful growth must come from acquisitions. As little growth can be expected from MMP’s existing portfolio, meaningful earnings growth can only come from acquisitions. In that respect, MMP has been fairly disappointing with no news on that front so far.

Maintain fair value at S$1.17 and BUY rating. In light of the better than expected 1Q results, we have revised up our FY06 and FY07 DPU forecasts by about 8.0% and 7.5% respectively to 5.69 cents and 5.70 cents. At present trading range, MMP will give investors a DPU yield of 6.1%. This makes MMP’s one of the highest DPU yields among S-REITs. More importantly, it is also the only REIT trading below book (P/B below 1.0x). Despite the lack of acquisition, we continue to like MMP for its yield as well as attractive valuation. We thus maintain our BUY rating and our S$1.17 fair value.

Extracts fm Philips Report dated 2-Feb-06,

Acquisition focus in place

Distribution income was in line, with DPU at 1.58 cents. In the period from 20 September to 31 December 2005, gross rental income racked in at S$25.2m with net property income at S$19.4m and distributable income at S$14.9m. This results in DPU of S$1.58 cents during the same period which exceeds our forecast of S$1.45 cents slightly. On an annualized basis, the DPU translates to a yield of 5.83% based on last closing price of S$0.95. Investors can take note that the ex-date of the distribution is on 7 February 2006 and will be paid out on 28 February 2006.

Portfolio performance and revaluation. Portfolio occupancy has improved from 92.1% to 97.2% YoY as at 31 December 2005. On a segmental basis, retail portfolio occupancy has already hit 100% while office portfolio occupancy reached 92.8%, consisting of occupancies of 94.4% for Ngee Ann City and 90.6% for Wisma Atria. This is only at a slight 2% away from our forecast of 96.8% and 92.5% respectively as updated in our previous report. Weighted average lease term to expiry of the portfolio stands at 4.1 years and MMP REIT is looking to increase turnover rents as percentage of gross rental income from 1.5% to 3%. As expected, MMP REIT has benefited from a boost of capital values in the Orchard belt. Due to revaluation of the property portfolio upwards by 1.84% from S$1.303b to S$1.327b, NAV per share has increased from S$0.94 to S$0.99 per unit. Of the revaluation surplus, it is important to note that 71% arises from the office portfolio in line with recovery of the office sector. In terms of tenancies, the retail segment is seeing increasing exposure from F&B and fashion sectors.

Gearing and interest expense. Amidst uncertainty over the rising interest rate environment with the Fed rate increased to 4.5%, MMP REIT has locked in 96.7% of its debt for 5 years until 2010 through 100% hedging of CMBS. Although this may allay risks of rising interest expense for its existing portfolio, future acquisitions that may be fully funded by debt is likely to increase the cost of debt for the portfolio. Because the maximum gearing level for S-REITs with corporate rating has been allowed up to 60%, management has indicated an optimum portfolio gearing level of 50% and this will translate to extra debt capacity in excess of S$500m.

Locality risk may be a concern in the short term. Before design of the Orchard Turn site is finalized, construction of the project which usually takes up to 2 to 3 years to complete poses short term risks to operations of the current underlying portfolio, especially the retail component. However it is revealed that in the tender documents, the developer is obliged to internalize externalities arising from construction of the project.

Plans for cross border portfolio expansion. Management has revealed that portfolio expansion will focus primarily on Japan and Malaysia apart from Singapore. On Malaysia acquisitions, distribution is also tax exempt with minimal withholding tax while second-tier cities in Japan may offer attractive acquisition opportunities with yield spreads less compressed compared to central Japan. In Japan, gearing is allowed up to 90% and is an attractive environment with 10-year government bonds around 1% levels. However, acquisitions may also be sought in countries including China, Hong Kong, South Korea, Taiwan and Thailand should attractive propositions arise. Although sectoral focus will be mainly on retail malls to leverage on MMP REIT’s core expertise and more room for asset enhancement potential, MMP REIT will continue to look out for good quality investment grade office properties.

Valuation and recommendation. In line with DPU slightly above forecast, we upgrade target price to $1.20 based on DDM valuation. At last closing price of S$0.95, we project an annualized yield of 5.59% and 5.76% respectively in FY06 and FY07 based on DPU of S$5.31 cents and S$5.47 cents respectively. Maintain BUY call on Prime REIT with attractive yield from quality assets.

Extracts fm DBSVickers Report dated 2-Feb-06,

Undervalued REIT

Macquarie MEAG Prime REIT (MMP REIT) announced FY05 DPU of 1.58 Scts, which was 12.1% above its IPO forecast. FY05 distributable income of S$14.9m was above forecast of S$13.3m due to better than expected office occupancy levels and retail lease renewals. Looking ahead, MMP REIT’s organic growth prospects are likely stable and consistent but unspectacular. However, significant DPU growth is likely possible through sizable acquisitions to its S$1.3bn asset portfolio, which management is actively pursuing in Japan, Malaysia and Singapore. Given the high quality of current property portfolio, we believe the stock is currently undervalued at 6.2% FY06 distribution yield. We have a BUY based on target price of S$1.10.

• FY05 results. FY05 DPU for 20 Sep-31 Dec 2005 was 1.58 Scts, or 5.60 Scts annualized. Portfolio occupancy climbed to 97.2% as at 31 Dec 2005 (up from 92.1% as at end-Jan 2005) with both retail and office occupancies at both properties exceeding forecasts. Distribution exdate is on 9 Feb 2006 and distributions will be paid on 28 Feb 2006.
  
  
• Possible upside catalysts. With significant asset enhancement opportunities, future DPU growth spurts are likely to come only from acquisitions. Management is actively pursuing acquisition opportunities in Japan, Malaysia and Singapore. While MMP REIT could potentially raise its gearing to 60% by obtaining a credit rating, management indicated its optimal gearing level is at 50%. With current gearing at 29%, MMP REIT could acquire up to S$567m in property-related assets if it increases up to the 50% gearing level, without needing to raise new equity.
  
  
• Valuation. Target price of S$1.10 per unit is from our yield-spread model, which is based on FY07 earnings and an implied 5.3% yield, derived from an assumed risk-free rate of 3.3% and a 200 bps spread. The implied spread is undemanding compared to its S-REIT and regional peers (see comparables below). This is supported by our DCF valuation of S$1.33 per unit. We have not included any acquisition assumptions.