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LMIR: Proposed 1 for 1 rights issue.

Saturday, October 1, 2011

I read with great interest the 1 for 1 rights issue proposed by LMIR. As regular readers know, I much prefer rights issue to private share placements as the former allows all unitholders to take part in the enlarged capital base of the REIT.


This rights issue is to raise some S$337m to help fund the purchase of two malls in Indonesia: Pluit Village and Medan Fair.  Pluit Village is to be purchased from the REIT's sponsor while Medan Fair is from an independent third party.

Pluit Village
Consideration: S$234m
Occupancy: 78.1%
NPI yield: 10.8%

Medan Fair
Consideration: $154m
Occupancy: 91.2%
NPI yield: 7.4%

Total purchase consideration is S$388m.  The proposed 1 for 1 rights issue at 31c per unit will raise some S$337m. The balance required for the proposed purchases will be funded by internal resources or debt.


LMIR's current NPI yield is 7.5%.  So, its purchase of Pluit Village is NPI yield accretive while that of Medan Fair is not. However, as the former is of a much larger value, it more than compensates for the latter. In aggregate, the purchase of the two properties is NPI yield accretive.

Now, is this rights issue good for unitholders?

The annualised distribution per unit (DPU) is estimated at 4c per annum currently. At the current unit price of 54c, that is a distribution yield of 7.4%. Subscribing to the rights issue at 31c per unit will give us an average unit price of 42.5c per unit. The number of units in issue will double while back of the envelope calculations show distributable income will increase only approximately 40%.

Therefore, DPU is likely to decrease to 2.8c per annum which will give us a pro forma distribution yield of only 6.59% based on the post rights unit price of 42.5c. So, this rights issue is not a good idea for unitholders who are investing for income. In terms of distribution yield, it is regressive.

Even if the management were to improve the occupancy of Pluit Village from the current 78.1% to 90%, it would not really make a difference.

This rights issue could be good in the longer run as it will probably send the REIT's gearing level to under 10% which will give it more debt headroom for future growth. It is perfectly reasonable to then question, with already such low gearing level in the first instance, why the REIT has to resort to such a large rights issue for these proposed purchases?

I have always thought of LMIR as a bullet proof REIT, a stable passive income generator. However, I have also been unhappy with their hedging policy which to me seems to suggest a mediocre management. I hope this rights issue is not going to prove me right (pun unintended).

Read announcement here.

Related post:
LMIR: Thoughts on partial divestment.

27 comments:

TangoXray said...

Its definitely not good for existing shareholders.

With current gearing of below 12%, why are the mgt not raising debt from the current low interest rates environment but asking shshlders for more $ for acquisition?

Unless they could justify the reasons, else I give a straight thumbs down to the current mgt of LMIR.

AK71 said...

Hi TangoXray,

For sure, if the proposed purchases were to be funded mostly through low cost debt instead of equity fund raising, it would be better for unitholders.

A 1 for 3 rights issue at 31c/unit should be more than sufficient in such an instance. The entire exercise would also be distribution yield accretive if this were the case.

I still have a dim view of the management but I am willing to give them a chance to explain their actions when they seek the approval of unitholders.

JJ said...

Hi AK,

Is the rent computed in Rupiah, or SGD?.

If it is the former, what about the possibility of the IDR getting stronger compare to SGD. With the strong economy Indonesia is currently enjoying, will this translate to a better stable return from LMIR?. This compare to the global economy slowdown which could have happen anytime (or is already happening).

Hwang said...

So even at 0.425, the yield will only be at 6.6%?

When i fully divested it two months back, i thought i will be moving back again when the price was right.

But now i guess i can stop monitoring LMIR and focus on topping up my existing REITs instead, especially Suntec.

Hubert wee said...

Hi AK, are there any dates out yet? i will be away for most of October..

AK71 said...

Hi JJ,

Rent is computed in Indonesian Rupiah and converted to Singapore Dollar.

Unfortunately, because of the management's hedging policy, a stronger Indonesian Rupiah is unlikely to translate into higher distributable income for us.

You might want to read this:
LMIR: Foreign exchange forward contracts.

AK71 said...

Hi Hwang,

It certainly looks that way.

I have been constantly disappointed by LMIR as I believe that it could have given out higher DPU over the last two years.

I like the proposed acquisitions but I question the rationale for the very large rights issue. Why do something that would hit unitholders where it would hurt the most?

Not only should such exercises be NPI yield accretive, for unitholders, we want them to be distribution yield accretive too.

AK71 said...

Hi Hubert,

Nope. They have to seek approval from unitholders first at an EGM. Wait for the circular which they will be sending out soon.

Have a good trip. :)

Anonymous said...

Noticed that it is DPU yield accretive when they used FY 2010 results but yield negative when using 1H 11 results. Why is there a difference in projected 1H and FY rental data ?

Other than that, the proposed rights issue wasn't a surprise. They had already mentioned their intention to acquired USD 2 -3 billion worth of mall assets within the next 24 - 36 months so equity fund raising is necessary and definitely more will come in order to hit this target. I wouldn't view this acquisition in a vacuum - it is clear that the equity raised here isn't solely for the acquisition of 2 properties. More are along the way so eventually DPU will increase again and so will the gearing. Makes better sense to do a rights first followed by acquisitions then to acquire first and then risk raising equity when the capital market is poor. Just look at FR, they just made a fully debt funded acquisition after raising rights to acquire assets with > 80% equity coverage.

Either way, I don't see any cheap REITs at the moment haha !

(Not Vested)

Nick

AK71 said...

Hi Nick,

It would be myopic to view the proposed acquisitions in a vacuum and indeed, I mentioned that the proposed rights issue would send gearing level to under 10%. This would provide more debt headroom for more acquisitions in future.

However, comparing with First REIT misses the mark. First REIT's rights issue was distribution yield accretive whereas the proposed rights issue by LMIR is not.

See: First REIT: Rights Issue.

The proposed rights issue isn't a surprise to me either. What is surprising is the size of it which, of course, would not be much of an issue if it were actually distribution yield accretive but it is not.

Anonymous said...

It would be tough to make a DPU yield accretive acquisition when the equity coverage is high. It is easy to make DPU accretive acquisition if LMIRT had used debt extensively. I wouldn't view this as a vacuum - rather I would see if this and the numerous acquisitions along the way (debt funded) be overall yield positive.

LMIR belongs to the developer-sponsor REIT model so the sponsor seeks to sell as high as possible in order to make a great profit. While FR belongs to the sponsor-lessor model where the sponsor tries to make a profit but not as large as amount that would destroy his rental expense in the future. I think this is why FR gets properties at a discount - buy low, rent low since NPI yield is fixed.

Either way, I do avoid developer-sponsor REITs unless the price looks really great haha !

Nick

Anonymous said...

Hi AK,

I noticed that the DPU yield would be accretive if they used FY 2010 rental income as opposed to 1H 2011 rental income of the two properties. If they used FY 2010 figures, the DPU yield would have increased from 8.38% to 8.43% while the 1H 2011 figures would have decreased DPU yield from 7.47% to 7.11%. The FY 2010 figures implies distributable income of S$29.05 million from the two proposed acquisitions while 1H 2011 figures implies distributable income of only $10.85 million.

The difference in values is explained here -

The NPI yields of Pluit Village and Medan Fair for the financial year (“FY”) ended 31 December 2010
(“FY2010”) and the first six months of 2011 (annualised), based on their respective purchase considerations, are 10.8% and 7.4% respectively for Pluit Village and 7.4% and 8.5% respectively for Medan Fair. These NPI yields are comparable to the NPI yield for LMIR Trust’s existing portfolio of 7.5% and 8.1% over the same period taking into consideration that the occupancy rate of Pluit Village as at 30 June 2011 is lower due to the ongoing process of tenancy enhancement, which began in December 2010.

The current property manager of Pluit Village has made the decision to terminate some tenants, and the overall occupancy rate has therefore been affected. The terminated tenants were local and low-profile specialty tenants, and the property manager intends to replace such tenants with other tenants of a higher quality and profile, which in turn is expected to heighten the overall image of the mall. The property manager is currently in the process of approaching various prospective tenants which fall under categories ranging from food and beverage to fashion and jewellery.



Hence, I think it is likely that rental revenues will recover once the review on the tenant mix is executed or else why bother terminating their tenancy !

What do u think ?

Nick

AK71 said...

Hi Nick,

We can only guess at the intentions or choose to rely on the publicised intentions of the REIT's management. Personally, I will assess the merits of each rights issue based on the facts on hand.

After this rights issue, there remains great potential for LMIR to bump up distribution yield, for sure. I have no doubt about that. How well will they do it when they do it? A pertinent question to which we do not have any definite answer, I believe.

As for distribution yield of the REIT, I am puzzled as to how you managed a base figure of 8.38% in one case and 7.47% in another case.

For me, I look at the current estimated annualised DPU over the current unit price to arrive at the current distribution yield. Then, I see how the proposed acquisitions and fund raising exercise will affect this yield.

I enjoy your insights as usual and look forward to being enlightened. ;)

Anonymous said...

Hi AK,

I am using the figures from pg 19 and 21 of their SGX Announcement. The difference in the base yield is due to the different base price used ie FY 2010 yield was computed using 31 Dec 2010 price. We can normalized the yield by using the latest base price of 54.0 cents -

Based on FY 2010 results, DPU yield would have improved from 8.22% to 8.33% while based on 1H 2011 figures, DPU will decrease from 8.22% to 7.67%.

However since 1H 2011 figures involved a significant lower occupancy due to asset enhancement + termination of current tenant mix, there was a decline of $8 million worth of revenue. Is it likely that LMIR will fail to attract new tenants ? I doubt so since if it was tough, why bother terminating your existing tenants leases.

The post acquisition gearing will most likely be around 9.1% (currently 12.0%). Highly suspect massive acquisitions this year and the next which can boost both gearing and DPU further.

But perhaps, my largest concern with LMIR is their forex hedging policy. I think this is where the Management can lead to better DPU growth if they get it right.

Cheers,
Nick

Anonymous said...

Hi AK71

Thanks for the many insights u have provided on your blog.

On the NPI yields used to assess whether each of the acqusitions is yield accretive, I am just wondering whether NPI yields take into account the method of financing the acquisition, since the acquisitions are financed partly by equity and partly by debt, albeit not a large proportion by debt. Would this have a bearing on the yield relating to the acquistion as a whole?

Thanks

Towel

AK71 said...

Hi Nick,

Thanks for the clarification. Much clearer now. :)

Yes, a constant thorn in my sides with LMIR is the management's persistence in a 100% forex hedge with its foreign exchange forward contract.

People who are in the know whom I have spoken with all agree that some hedging is necessary but a 100% hedge is excessive.

I always wonder why their CFOs don't last very long in the job. Hmmm...

AK71 said...

Hi Towel,

I remember I had a blog post on NPI yield many moons ago but I can't seem to locate it now. One day, I will have to sit down and somehow organize all my blog posts.

Anyway, since I am unable to provide you with a hyperlink to a blog post on the subject, here is a short explanation.

The NPI of a property refers to the gross rental income after deducting expenses. If you take into consideration finance cost amongst other things, you would be looking at net income.

So, to answer your question, no, how acquisitions are financed will have no bearing on NPI yields. :)

Anonymous said...

Hi AK71

Thanks for your prompt response and for your explanation on the NPI yields. Have just started reading your posts and so, have not read your NPI yield explanation which u have posted many moons ago.

I have a follow up question - While how a property acquisition is financed does not affect NPI yield, would it affect how we as investors evaluate the attractiveness of an acquisition, since method of financing and NPI yield together would determine whether an acquisition is attractive ... what I am trying to say is that whether an acquisition is yield accretive or not, we should look at the so-called "effective" incoming yield after taking into account financing method. So we should not compare NPI yield with the current DPU yield? NPI yield may not be attractive compared to current DPU yield, but the acqusition could be good for us investors if the "effective" yield of the incoming asset after taking into account financing method is higher. Hope you could help me see things more clearly.


Thanks

Towel

AK71 said...

Hi Towel,

This is exactly what I am exploring in the blog post. :)

When we look at a company's gross profit, we have to look at its nett profit as well. Similarly, when we look at a REIT, we have to look at its nett rental income and not just its gross rental income.

When we invest in REITs, we are primarily after income. So, nett income is of great interest to us.

When a REIT makes an aquisition, initially, we want to see that it is NPI yield accretive. How it is then financed will determine if the whole exercise will be distribution yield accretive.

Is it by debt or equity or a mixture of the two. If it is by debt, chances are it will be distribution yield accretive as the number of units in issue remains the same while distributable income would most likely increase. An example would be Sabana REIT which recently acquired quite a few properties using only debt.

If it is to be funded through equity, it would depend on the size and value of the rights issue. That will determine whether we have distribution yield accretion. Example of distribution yield accretive rights issue was First REIT's.

Of course, funding through equity could also take place by having private placements. Suntec REIT seems to have a penchant for private placements, for example.

So, NPI yield accretive purchases are what we should be after but more importantly if we are investing for income, we want to see distribution yield improve as well.

I hope this helps. :)

Imperfect Person said...

Pluit Village is a very wrong mall to be bought.. it is a dead mall.. I went there in weekend also never see crowd... i will vote no to this !

AK71 said...

Hi Imperfect Person,

First hand account. This is very useful. Thank you. :)

Well, that could explain why the occupancy rate is 70+%. Could this also suggest that the management was being economical with the truth in their announcement in SGX? ;)

Personally, I have only heard accounts from a friend in Indonesia that she goes to the gym there every morning to work out. I cannot remember the reason why she likes the mall though.

Anonymous said...

Hi AK71

Understand now. Thanks so much.


Towel

AK71 said...

Hi Towel,

You are welcome. I am glad I did not confuse you with my explanation. Sometimes, I get lost in my own writing. ;p

JJ said...

Medan fair is considered an old mall, though strategically located in the city, only low purchasing power locals love to visit in comparison to sun plaza which houses branded shops' or tenants where loaded youngsters like to hang out.

Medan fair's juz like Golden mile.

Another new joint is Cambridge which also raised its popularity among loaded youngsters.

AK71 said...

Hi JJ,

Thanks for the first hand account. Perhaps, after acquisition, LMIR will do some AEI on Medan Fair. Seems like a logical thing to do so as to increase NPI. :)

SnOOpy168 said...

Just read this. Should they just raise a bit more funds during the rights instead of rolling over the debt ? Unless the interest per unit, is lower than our DPU. Makes business sense then.



REFINANCING OF LIPPO MALLS INDONESIA RETAIL TRUST’S EXISTING
BORROWINGS DUE ON 26 MARCH 2012
Further to its announcement dated 28 September 2011 relating to the entering into of a facility
agreement to, inter alia, refinance its existing bank borrowings due on 26 March 2012, LMIRT
Management Ltd., as manager of Lippo Malls Indonesia Retail Trust (“LMIR Trust”, and as
manager of LMIR Trust, the “Manager”) is pleased to announce that LMIR Trust has, on 13 December 2011, effected a drawdown of S$147,500,000 under the facility agreement and has successfully refinanced its existing bank borrowings. The new facility will be due for repayment 30 months after 13 December 2011

AK71 said...

Hi SnOOpy168,

I actually proposed that they should have a smaller rights issue back then. It would have resulted in a higher DPU if they had funded a larger part of their latest acquisitions through debt instead. REITs should make judicious use of leverage to give the best possible returns to unitholders. :)

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