Macquarie MEAG Prime REIT Undervalued

Macquarie MEAG Prime REIT
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.
Forecasts and Valuation General Data
Issued Capital (m shrs) 94