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Stock: MDT AU
Name: Macquarie DDR Trust
Price: A$0.09
Market Cap (m): A$84
Volatility index: Very High

Event
MDT reported 1H10 core earnings of $14.5m, or 1.54cpu. No distribution was paid due to the need to preserve capital to reduce debt. MDT remain in breach of two debt facilities and three Head Trust derivative contracts post revaluation losses at June 2009.

Impact
Three debt facilities and associated liabilities worth US$502 currently under negotiations with lenders. MDT remains in breach of covenants on two of its debt facilities (US$318m) and three Head Trust derivative contracts (aggregate net liability balance of US$39m) after loan to value covenants were breached in June 2009. Management remains in negotiations with lenders on these two facilities and will not provide any guidance to earnings going forward until these issues are resolved. In addition to the facilities in breach of covenants, there is a US$145m facility which is due to expire in April 2010. Management is currently seeking a two year extension on this non-recourse facility.
Core earnings per unit for 1H10 fell to 1.54 cpu, a 65.5% reduction on 1H09. The biggest contributor to this fall was FX and hedging (-23.5%) followed by falls in property NOI (-20.4%) and the loss of Mervyns income (-10.8%). Not included in 1H10 core earnings figures are negative earnings of 0.67cpu from the ex-Mervyn centres for the half year, however this was fully funded through letters of credit.
NTA fell to $0.32 from $0.38 in June 2009, a fall of 15.8%. This was mostly due to movements in the Aussie dollar (-10.5%) and falls in property values (-7.9%), but offset somewhat by leasing success over the period (+5.3%). The portfolio weighted average cap rate softened from 8.6% at June to 8.9% at December.
ICR was 1.7x for 1H10 excluding the Mervyns debt costs, but would be 1.5x if the Ex-Mervyns portfolio were included This is down from 2.1x in 1H09. Gearing (measured as debt to total assets) increased to 76.4% from 76.1% at 1H09.
High gearing means NTA is sensitive to movements in asset values. Assuming no changes to earnings, a 25bp change in cap rates would see a change in NTA of between 4 and 5 cps, or a percentage change in NTA of between 13% and 16%. It is important to note while the above sensitivity is not linear, it does provide a reasonable approximation for the effect of further cap rate changes on NTA.
Occupancy of the shopping centre portfolio remained steady at 89%, with no change since June 2009. Total portfolio occupancy including ex-Mervyns assets is 80.3% and the weighted average lease maturity was 5.1 years, with anchor tenants making up 62% of the tenants (by base rent) and having a weighted average lease term of 5.9 years. MDT leased 5.1% of the portfolio during 1H10, however rental spreads were down 12.3% on a weighted average basis for the half year.
No further asset sales anticipated for near term. Management noted that further asset sales at this stage in the cycle would not be in the best interest of shareholders or debt providers.


Action and recommendation
Our recommendation and valuation on MDT are currently restricted.

June 2009A 2010E 2011E 2012E
Sales revenue m 239.5 181.7 182.9 184.9
EBITDA m -478.9 163.7 164.7 166.7
EBIT m 213.0 163.7 164.7 166.7
EBIT growth % -24.5 -23.2 0.6 1.3
Recurring profit m -598.5 52.5 55.8 52.3
Adjusted profit m 68.8 35.1 37.5 35.0
EPS adj 7.3 3.7 4.0 3.7
EPS adj growth % -25.1 -49.3 6.9 -6.9
PE adj x 1.2 2.4 2.2 2.4
Total DPS 0.0 0.0 0.0 0.0
Total div yield % 0.0 0.0 0.0 0.0
Franking % nmf nmf nmf nmf
EV/EBITDA x -0.2 0.5 0.5 0.5
GCFPS 10.0 5.3 5.6 5.2
PGCFPS x 0.9 1.7 1.6 1.7
Net debt/equity % 0.1 -7.7 -7.9 -8.0
Price/book x 0.3 0.3 0.3 0.3
*All values are in AUD unless otherwise stated.
Source: Company data, Macquarie Research, Feb 2010.