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LMIR: Will I subscribe to the rights issue?

Sunday, October 2, 2011

It is clear that my complaint about the proposed rights issue is that it is not distribution yield accretive. In fact, it seems to me that the distribution yield could suffer quite significantly, post rights issue.

If I were to subscribe to the rights issue, it would be with the believe that the management will acquire more malls which are NPI yield accretive in the not too distant future using only debt. With its improved debt headroom by then, it should not be a challenge to acquire malls with a total pricetag of around S$450m using only debt.

Assuming that the purchases would have similar or slightly higher NPI yields as the REIT's current portfolio, this could improve distribution yield some 30 to 40% based on current estimates (ok, my estimates). So, subscribing to the rights issue would be akin to a confidence vote for the management.


If we believe that the global economy is going into a recession and that European entities could be recalling funds from Asia to address their financial problems back home, it is reasonable to assume that unit price of LMIR could suffer somewhat.

As there is no compelling reason in the present to subscribe to the rights issue, we could sell the nil-paid rights when they start trading in the hope that we could buy more units in LMIR at a much lower price in the event of a sell down.

Indeed, for some, they could even sell their units in LMIR when the market opens tomorrow if they feel that the proposed rights issue is a bad deal and, hence, will have no part in it.

How will Mr. Market react to the proposed acquisitions and rights issue? It is anyone's guess.

Will I subscribe to the rights issue?

Unlike the earlier rights issues of AIMS AMP Capital Industrial REIT and First REIT, it is not a screaming buy.

Unlike the rights issues of CitySpring Infrastructure Trust, it is not raising funds to strengthen its balance sheet which means it is not a screaming sell.

Anyway, it is early days yet. I will stay rational and wait for more specifics, if any. I will see if there is more information forthcoming in the promised circular and at the EGM.

For readers who have the inclination, reading my past blog posts (and comments) on other rights issues might provide a window into my thought processes:

1. CitySpring Infrastructure Trust: Rights Issue.
2. First REIT: Rights Issue.
3. AIMS AMP Capital Industrial REIT: Rights Issue.

Related post:
LMIR: Proposed 1 for 1 rights issue.

38 comments:

Marti said...

Well seems the market doesn't like this right issue, the stock is getting a beating this morning.

AK71 said...

Hi Martin,

It would seem that way.

Although there is broad based weakness in the stock market today, the unit price of LMIR suffered much more than most.

Calvin said...

Hi AK,

Like you, I am puzzled as to why there is a need for such a large rights issue when the leverage is already so low.

Even more puzzling is the over 40% discount to the previous stock price. Why are they pricing the rights issue on the low end?

Like you, I will continue to watch and see what happens. I am still bullish about the prospects, but just a little bit puzzled by their decisions.

Calvin
http://www.investinpassiveincome.com

INVS 2.0 said...

Hi Ak71,

Sounds like a gamble. It's either to buy it and win big time or lose.

AK71 said...

Hi Calvin,

The rights issue has to be priced with a large discount to make it more attractive to investors. In fact, I would have liked for the rights issue to be priced even lower in order to have the pro forma distribution yield marginally accretive.

The only reason I can think of for such a large rights issue is that it paves the way for future acquisitions to be carried out without having to issue rights again. Well, at least not too soon.

It would be an interesting EGM. ;)

Sandy said...

Hello AK47, I have recently read your blog . personally I have a large REIT portfolio. I am holding LMIR as well and quite disappointed by their management so far. They are not doing well even in pricing the rights, not enough discount offered to make the post rights yields attractive.

Would you know any EGM where such motions have been defeated? Very unlikely?

A loose loose situation .

AK71 said...

Hi INVS 2.0,

Well, chance is one of the things we have to contend with when we invest in the stock market. So, it is not anything new to me. :)

We can only try to mitigate risks and not remove risks. This is what I have been trying to do. Sometimes, I am succesful and sometimes not.

With LMIR, I am pretty sure that the sponsor wants it to succeed. It has, after all, spent millions of dollars to kick Mapletree out of the picture.

Therefore, I am inclined to go with the rights issue although I cannot in all honesty say that the management will deliver on my expectations. My expectations remain just expectations. ;)

AK71 said...

Hi Sandy,

Yes, I have felt disappointed with LMIR's management for quite some time. Specifically, I am unhappy with the foreign exchange forward contracts in their 100% forex hedge strategy which has lost millions of dollars in the last two years. This money could have been distributed to unitholders instead if they had practised, say, 50% hedging instead.

With the proposed rights issue, I am aware of the advantages of its large size. However, that it would probably not be distribution yield accretive runs against the grain for me as an investor who is investing for income.

At the EGM, investors could raise questions including those I have blogged about. However, I doubt very much that we could block anything as we remain minority unitholders.

To say that it is a losing proposition for minority unitholders, however, would be somewhat extreme.

After all, a 6.6% yield in a lowly geared REIT which translates to very low financing risk, is not too bad. My complaint is that it could be better. ;)

Calvin said...

Hi AK,

I think the large discount to share price is not really "an attraction" to unitholders. It's more like forcing to existing unitholders to subscribe or face massive dilution of your current equity since the Rights is only priced at 31 cents.

Anybody who bought LMIR at above this price have no choice but to subscribe or be diluted at such a low price. If existing unitholders are not happy with the arrangement, there is no recourse as the stock price has already fallen to reflect the theoretical ex-rights price (TERP) and the sponsor can subscribe for these rights.

In fact, to create value for existing shareholders, the discount should be much lower, maybe between 10-20%.

Calvin
http://www.investinpassiveincome.com

AK71 said...

Hi Calvin,

I think you will see that most unitholders will see a bigger discount as attractive. That has been my experience with rights issues at least for REITs.

Why should I pay more to get a lower yield? I want to pay less to get a higher yield. It is clear which option provides unitholders with greater value immediately.

Also, no one is forced to subscribe to the rights issue as nil paid rights could be sold when it starts trading.

I believe that the heavy selling down of LMIR's units is due to unhappiness with how the entire exercise is not distribution yield accretive. If it were, people would not sell their investment in the REIT, they would indeed add to their investments even with the rights heavily discounted.

Calvin said...

AK,

It's one way to look at it in terms of yield. But say you are a partner in a business and you need capital. You decide to issue new shares to raise capital. Since you are selling equity, would you price it high or low? A high price may not be attractive to new investors, but a low price invariably values your equity stake at a much lower value.

You want the new units to be sold at a reasonable price hence confirming your value of the company. By selling cheap, you yourself need to come up with capital or else you will get diluted.

I for one would like my stock to retain its value and not sell itself for cheap. It's just my way of looking at things.

Calvin
http://www.investinpassiveincome.com

AK71 said...

Hi Calvin,

I assess the attractiveness of a rights issue from the standpoint of an investor. I don't go beyond that because that is what I am, an investor.

If the rights issue is attractive, I support it. If it is not attractive, I am less likely to support it.

Having heavily discounted rights is quite common for S-REITs. So, if this is something you find hard to accept, you might want to get used to it as there will probably be more of the same. ;)

Pricing the rights at a much lower price than prevailing unit price does not mean a lower valuation of the underlying assets of the REIT. It simply means that investors are getting a better deal. Again, as an investor, I want a better deal.

Investing in REITs is primarily investing for income. So, distribution yield is more important a consideration for me.

INVS 2.0 said...

Hi Ak71,

REITs fell to another new low again. Is the property market crashing soon? :(

AK71 said...

Hi INVS 2.0,

If I tell you I know, would you believe me? ;p

It is important for us to know that we do not know everything. In an environment of imperfect knowledge, all we can do is to plan around this reality and stick to the plan. ;)

Sandy said...

Hi AK 47 , agree with your comments. Would you think it makes sense to apply for excess rights... one never knows, after rights, market may price it even below 31 Cents ... making it to yield similar to Sabana and AIMS and close to suntec.

Low gearing is a plus compared to the other REIT's but with the kind of management in place people do not seem to have confidence in it. it was sold at 40% discount to NAV before the rights announcement and if we go with the same discount the price could be close to 34-35.

Not sure it is worth the risk to subscribe to the excess given that market is already so week and can keep the price below 31 ..... what's your take

INVS 2.0 said...

Hi AK47,

Well, I am having reds all over the place. But those are just paper losses and I can still get dividends if I hold on to the stocks. Right now is to build up on investable cash and ready to exploit the market again if another 2008 scenario takes place.

The global economy is getting scary as month passes by. My patience is being tested again and again as historic lows are formed. :/

AK71 said...

Hi Sandy,

In the last bear market, I bought some units of LMIR at 18c per piece. So, could its unit price go below 31c, post rights? Who knows for sure? It could, I suppose.

However, if we were to subscribe to the rights issue, it would make sense to apply for some excess rights to gain a better distribution yield for our investment in the REIT. This is in the current time frame and something we can see.

What I cannot see, I can only speculate and I am not sure it is very useful in this instance. ;)

AK71 said...

Hi INVS 2.0,

Just remember that when there is a lot of fear in the air, we should not be fearful too. Instead, we must sit up and look out for bargains. ;)

INVS 2.0 said...

Hi Ak71,

Yes, thanks for the golden reminder. I will stay firm despite the storm outside seems too much for a novice investor to handle. :D

AK71 said...

Hi INVS 2.0,

That is one of the advantages we have being invested for income.

If market trades sideways, we have regular income from our investments. If the market moves down, we can add to our investments locking in higher yields, all the while collecting income from our existing investments.

The day the stock market recovers, a rising tide will lift all boats and we could benefit from capital appreciation as well.

So, sit tight and enjoy the ride. Well, let's try, anyway. ;)

Hwang said...

All my REITs and the only stock in my portfolio are in reds. The same goes with my unit trust funds. I have gave up trying to beat the Market.

So, i fully agree with INVS2.0 to build up investable cash and spend them prudently like what AK says every time. Not too worried as long as i am still working and the CEOs don't screw up those trusts .

Enjoy the the warmth of the bear while it last :)

AK71 said...

Hi Hwang,

Each time I tried to beat Mr. Market, I would fall flat on my face. Well, maybe there were once or twice when I did better. Just maybe. ;p

I have my seat belt on for the ride. Could get rather nerve wrecking. ;)

SnOOpy168 said...

Resolution was passed yesterday.

1 for 1 @ 0.31 each.

http://lmir.listedcompany.com/newsroom/20111020_190019_D5IU_B645EB1225DA7FD44825792F00286294.1.pdf

Time frame:

4 Nov
Rights Issue book closure date

10 - 18 Nov
“Nil-paid” rights trading period

24 Nov
Close of Rights Issue

I am still thinking to subscribe or sell my rights and use the $$ for Sabana REITs.

AK71 said...

Hi SnOOpy168,

Thanks for the update. Much appreciated. :)

I will probably be subscribing to the rights issue. Will try my luck at excess rights too. ;)

Ah Guan said...

Hi Guys, Greetings, Am a newbie in this rights issue.

Looking at the timeframe, when can I visit the ATM to subscribe to the rights ? Had i missed the boat ?

Time frame:

4 Nov
Rights Issue book closure date

10 - 18 Nov
“Nil-paid” rights trading period

24 Nov
Close of Rights Issue

AK71 said...

Hi Ah Guan,

Wait for the package from CDP. You will get it in the mail soon.

I usually visit the ATM after the nil-paid rights trading ends. :)

Anonymous said...

Hi AK,

May I ask you a question please?
I were to 'buy' the excess rights (08ZR) today from the open market today, how do I exercise the rights and pay for the units that I have brought? Thank you.

BT91

AK71 said...

Hi BT91,

We cannot buy excess rights in the open market. We apply for excess rights at the same time when we pay for the rights we have.

We can buy rights in the open market and these are known as nil-paid rights.

Wait for the package from CDP which will contain instructions on how to convert the nil-paid rights into regular units. We will receive this a few days after the rights stop trading. :)

Anonymous said...

Hi AK71
Heard from someone that I cannot apply for excess rights if I buy nil paid rights from the open market.
I can only apply for excess if
I am entitled to the rights issue.
Care to comment?
Thanks for your input.

CSTan

AK71 said...

Hi CS,

That is my understanding too, that only existing unitholders have a chance at getting excess rights if they choose to apply for them.

SnOOpy168 said...

Just ATM my allotment and cheong for excess rights. 100% excess.

Lets see how far the % of excess I get.

Anyone wanted to start a table, excess rights applied for / granted

Snoopy168 = 100% / ???%

AK71 said...

Hi SnOOpy168,

You are fast! I am still accumulating nil-paid rights. So, I will only visit the ATMs after they stop trading on 18 Nov. :)

SnOOpy168 said...

AK . Me not KS here lah.

I am still learning about the nil-paid rights, it's calculations and how to exercise.

So, might as well I stick to something within my means and understanding.

Huat ah everyone.

AK71 said...

Hi SnOOpy168,

That is a good strategy. Do what we understand and sleep well at night. ;)

SnOOpy168 said...

LMIR TRUST ANNOUNCES OVERSUBSCRIPTION OF RIGHTS ISSUE AT 165% DRIVEN BY OVERWHELMING INSTITUTIONAL AND RETAIL DEMAND

- Total acceptance rate at 165% of Rights Issue Units available;

- One of the highest acceptance rate in S-REIT history;

- Strong vote of confidence from Unitholders in LMIR Trust’s growth potential and future direction

OK. I had cheong for 100% excess rights. Perhaps I get 65% excess and the balance refunded.

When will we know the result leh ?

AK71 said...

Hi SnOOpy168,

Thanks for the update. You are really prompt. :)

Ah, such enthusiastic response to the rights issue. I was hoping that the response might be lukewarm judging from the strong sell down of the rights when it was trading for a week.

Rights units will be issued on 2 Dec and will start trading on 5 Dec.

SnOOpy168 said...

I am still curious.

There seems to be always a group of "Ineligible Unitholders". How did these group of investor exist ?

Have to thank them for the nil-paid rights available or not taking it up. For sure, the recent cityspring rights, I ignored it. Sure enough, the post rights prices are lower than the rights itself ! Painful lesson for me, not knowing when to cut loss - afterall, it is in a monopoly sector but....

AK71 said...

Hi SnOOpy168,

What I know is that our registered addresses with CDP must be in Singapore to be eligible. :)

As for CitySpring, I have said enough and I am sure you have read my blog posts on the subject as well. Don't let it bother you too much. Bygones. :)

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