• 9.0% acquisition cap rate
• Five-year Master Leases
• Re-iterate BUY

Mall Still Under Stabilization

Lippo Malls Indonesia Retail Trust (LMIRT) recently entered into conditional share purchase agreements to acquire the entire issued share capital of PT MASB for ~S$33.2m which is to be financed from debt and/or perpetual securities. PT MASB in turn owns a Kendari property under a Build-Operate-Transfer (BOT) agreement with the Government of Southeast Sulawesi. The BOT period is 30 years from 2 Nov 2012, after which the property has to be handed over to the government. The asset is a four-storey shopping mall, 21.0k sqm in NLA, and has yet to reach stabilized occupancy or full market rental levels. With a FY16 NPI of S$3.0m, the acquisition cap rate is ~9.0%. Upon completion of the acquisition, LMIRT’s portfolio is estimated to increase by ~1.6%.

Master Leases to be Signed

Immediately prior to completion of the Kendari Acquisition, vendor PT MPU will enter into fiveyear Master Leases occupying 4.7k spm in NLA for Rp. 15.1b in annual rent. In FY16, the underlying tenants of these would-be Master Leases contributed only 36.4% of Rp. 15.1b rent (see Exhibit). Nonetheless, we note that the two independent valuers expect this total underlying revenue to be sustainable from the sixth year onwards (see Exhibit). PT MPU has also committed at its own cost, to provide an asset enhancement initiative to the mall mainly to convert part of the existing major tenants area into specialty tenants area and casual leasing area to improve rentals. The areas that will undergo asset enhancement will form part of the Master Leases.

In Line With Management Strategy

On a pro forma basis, FY16 DPU would increase from 3.41 S cents to 3.42 S cents or 0.3%. While the acquisition is relatively small, we see the acquisition of an asset outside Jakarta as being in line with LMIRT’s strategy for tapping on Indonesia’s continued urbanization. Pending the fulfillment of the conditions precedent to the acquisition’s completion, we keep our forecasts for now. LMIRT is currently trading at 8.2% FY17F yield. Re-iterate BUY on LMIRT with a fair value of S$0.435.

Source: OCBC Research - 12 Jun 2017