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LMIR: 1Q 2010 results.

Wednesday, May 12, 2010


For me, the important numbers are the following:

1. LMIR is trading at a huge 43% discount to NAV 84c.
2. Gearing is very low at 10%.
3. Annualised yield is 10% at the unit price of 48c.

Despite the very strong fundamentals, LMIR's unit price has been languishing.

Technically weak, it has closed below the 200dMA support today after forming lower highs since the start of the year. The next support is at 47c. If this breaks, price could fall to as low as 44c, I reckon.



MFI has been forming lower highs, suggesting a lack of positive buying momentum, making a further weakening in price for this REIT probable. So? I would definitely accumulate on weakness if it does come to that. 44c would be a bargain!

See presentation slides here.

Related post:
LMIR: More units at 10% yield.

10 comments:

Anonymous said...

Hi,

I don't understand this reit. Maybe you can enlighten me.

1Q10 - Net Property Income - 20345
4Q09 - Net Property Income - 19724
3Q09 - Net Property Income - 19398

Seems like a story of growth, right? DPU should exhibit an increasing trend?

1Q10 - 12877 *
4Q09 - 12441
3Q09 - 13083

*(605k as doubtful loan recovered as stated in press release)

I don't know if the 605k was included in this quarter's distribution. But just compare 3Q09 with 1Q10. NPI increase by 1 million or 5%, Distribution did not increase at all.

Take a look at the exchange loss realised
1Q10 - (1729)
4Q09 - (873)
3Q09 - (364)

Seems like the exchange loss > increase in NPI.

Compare the current exchange rate with historic 10 year rate. Is the rupiah going to appreciate more, does that equate to more foreign exchange loss?

Am unclear about the foreign currency exchange. Not vested any more. (switched to AIMSAMP already)

On the point about Discount to NAV, if your DPU is set decline for quite some time (forward currency exchange contract maturity date 2013) , I would pay a lower price for the share, hence a large discount. Vicious circle.

Wee~

AK71 said...

Hi Wee,

LMIR's management understand that investors' primary aim of investing in a REIT is to have a stable income stream. So, as you already know, they try to limit foreign exchange risk by hedging 100% of the REIT's estimated distributions.

Hedging is, of course, a double edged sword. If the Rupiah should decline, income distribution in S$ remains unaffected. If the Rupiah should appreciate, we will not benefit much in S$ terms either.

So, as the management explained in their presentation, the lower dpu is "mainly due to higher financial expenses including a realised
loss on the cross currency swap". This is something unitholders have to live with.

Unfortunately, we can't have our cake and eat it too. I would opt for predictability with the foreign exchange hedge as it is probably the lesser of the two evils.

As for which direction the Rupiah is likely to go, it has had a very good run and like all Asian currencies, it will probably increasingly strengthen against the US$ in time.

Against the S$, the Rupiah has appreciated a fair bit as well. With the MAS' recent one time adjustment of the S$ upwards and allowing it to appreciate gradually over time in the near future, I do not realistically expect the Rupiah to rocket ahead of the S$.

I really enjoyed your comments. Thanks! :-)

Anonymous said...

Hi,

Thank you for your insight. I'm still learning. :)

Wee~

AK71 said...

Hi Wee,

I am still learning too and happy to share my views. I am sure I am not always right and I have learnt things from readers too. :-)

Anonymous said...

Hi,

Thanks for the informative post on LMIR. I have some questions here...

1. If IDR do strengthened against SGD, would it mean they LMIR incur more or less losses on the exchange? Dividends is in the form of SGD, so if IDR strengthens, it means that they can afford to pay more distribution right?

2. Their losses on their currency swap can be huge, wouldnt this affect the distributions?

3. We know that LMIR is trading at substantial discount, has good yield, low gearing, strong backers, but why is the share price not appreciating? Is it due to Indo assets?

John

AK71 said...

Hi John,

A foreign exchange hedge is to eliminate foreign exchange risk. So, a forward contract would lock in an exchange rate for the future.

So, if the Rupiah depreciates against the S$, we would not be paid less. Conversely, if the Rupiah appreciates against the S$, we would not make more. In fact, in the latter scenario, a bigger loss would appear but the final income distribution in S$ terms is more or less stable.

That's basically it. It is unlikely that it would affect distributions adversely in a big way. It is meant to ensure predictable income in S$ terms for investors.

LMIR has always suffered from an "Indonesian discount" compared to retail REITs with properties in Singapore. Doesn't matter to me. I am vested for the income distribution. :)

Anonymous said...

Hi AK,

I'ld like to ask you about the high interest rate for the $125 million loan. (weighted ave interest rate = 7.7% pa, taken from annual report 2009 pg 32)

If we were to look at how "efficient" the malls are performing, perhaps we can compare [Net Property Income (NPI) per annum / Total Value of Investment Property] VS the interest rate of 7.7%. Ideally the return from rental should exceed the interest rate, else it would be foolish to take the debt.

Bearing in mind that there was a revaluing of property value upwards in the quarter ended 2009, let us take the value of investment property from 3Q 2009.

NPI for 3Q2009 = 19398
Property Value = 931366
4 X NPI / Property = 8.331% per annum

If we take into account the base fee of 0.25% per annum and the performance fee of 4% per annum of NPI..

Base fee = 0.25% per annum
Performance fee = 4% x 8.331% = 0.333% per annum

So we have the properties giving us 8.331% NPI return.
Total expense % = 7.7 + 0.25 + 0.333 = 8.283%

The returns from taking debt is not that attractive, not much of a safety margin IMO. Plus the effect of property valuation upwards since 4Q2009. Value of property increased 13% QoQ, but NPI has remained fairly flat.

So either the valuation is too high, the rental is too cheap, or simply the interest rate is unfavourable.

Whether LMIR is lowly geared or not, as long as the interest rate stays high and the "efficiency" of the mall to generate returns doesn't improve significantly, it will not be able to tap into that to source new acquisitions. The key really is to refinance at a lower rate. That would then be an interesting development.

Wee~

PS: I'm not sure if the above analysis is a valid way of looking at LMIR, so I'll very much appreciate your comments.

AK71 said...

Hi Wee,

Another quality comment. :)

The loan of S$125m came about in early 2008 in the acquisition of Sun Plaza in Medan. At that time, the cost of debt was 6.42% pa and was for a period of 5 years. Pretty reasonable.

However, during this last crisis, the loan was restructured as the lender, Deutsche Bank, required some consents from certain counter-parties for increased security. The requirements were later waived permanently and the loan tenure shortened to 4 years with a higher interest rate of 7.7% to reflect a perceived "higher risk". Of course, lenders were all pretty risk averse then.

The interest payment on the loan is S$9.63m a year. Sun Plaza accounts for 16% of LMIR's gross revenue which in 2009 was S$76.638m. 16% would be S$12.742m. So, the revenue Sun Plaza generates more than covers the interest payment on its loan by a comfortable margin. That's good enough for me. :)

In property investment, each single investment should be self-sustaining. No one investment should be loss making and leaching on the earnings of other investments. As long as this condition is met, as an investor, I am satisfied, understanding that not all investments are equal.

Having said this, yes, if the loan could be re-financed at a lower interest rate, it would be most beneficial. With the credit market improving rapidly, this is not impossible. :)

Good to look at the trees but let us not forget the forest. ;)

Anonymous said...

Hi,

Thanks for your input. Another way to look at this is that currently the rents look cheap compared to the present property value. It could be due to appreciation of property throughout the years or simply that the management was able to secure new acquisitions at a discount from the sponsor.

On another note, it is interesting that unitholders are paying more for the manager since their compensation is pegged to property values + NPI, both of which are increasing. (DPU has been declining though).

Of course, if you feel the management has a proven track record (pardon me, but avoid the memory effect if you have gotten LMIR cheap) and is well worth the money, there is no issue with the current situation. But if the management fails to make good use of the low gearing + fails to refinance the loan at a lower interest rate... The last thing you want is a self-congratulatory passive management. Only time will tell, but for now even without that development, the current yield is decent, though I would tend to prefer AIMS due to the clear outlook provided by manager. Whether that materialise is another story though. With LMIR I might have to contend with realised foreign exchange loss/gains.

Thanks again.

Wee~

AK71 said...

Hi Wee,

LMIR's lease expiry profile shows that more than 80% of the leases will expire only from 2012 onwards. So, there is little room for upward reversions of rentals, it would seem.

On the issue of management compensation, you have made a very good point. However, the management has so far shown their ability to navigate rough seas. We can only wait and see if they are worth the fees we pay them over time.

The average cost of my investment in LMIR is pretty decent and, yes, I still have those bought at much lower prices. Based on the current conditions, my investment in LMIR is a bargain. For sure, if conditions in the present should change to make my investment in the REIT a bad one, the right thing to do is to accept the situation and move on. Thanks for the reminder about "the memory effect". ;)

As for living with LMIR's foreign exchange losses/gains, if it bothers you sufficiently, you might want to consider divestment, fully or partially, if its price makes a move up in futuure. There are other REITs which could deliver a 10% or near 10% yield, after all. :)

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