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LMIR: Bought some nil-paid rights.

Friday, November 11, 2011

I made my first transaction in the stock market since my return to Singapore. I bought some LMIR nil-paid rights at 5.6c each. Some might ask why not buy LMIR units instead as they are trading at 38.5c each cum distribution of 1.06c now.


At a conversion price of 31c per rights, getting nil-paid rights now at 5.6c means a total price of 36.6c. With an estimated annualised DPU of 3.26c, post rights issue and acquisitions, we are looking at a distribution yield of 8.9% and a very low gearing of under 10%. I think this is pretty attractive.

Now, if we were to buy the units at 38.5c and secure the 1.06c income distribution, our cost (to make a fair comparison) would be 38.5c - 1.06c = 37.44c. Compared to buying the nil-paid rights, it is a tad pricier (at about 2.3% more).

For anyone who would prefer to secure the said income distribution for any reason, the REIT goes XD on 16 Nov.

Last day of trading of nil-paid rights is 18 Nov. I will wait to see if I could collect more on the cheap.

Related post:
LMIR: Circular to unitholders.

46 comments:

Anonymous said...

Hi AK71
Haha. I did the same thing yesterday. I bought 90 lots of Nil rights at $0.052 and sold my 90 lots of mother shares at $0.385. But I must remember to pick up the rights issue by 24 Nov 2011. I guess I made a little yesterday.
With best regares

CSTan

AK71 said...

Hi CS,

Arbitrage. Why not? The difference is equivalent to a quarter's worth of income disribution. ;)

Yes, must remember to pick up the rights and be careful when keying in at the ATM.

I still remember how one of my readers keyed in wrongly for Healthway Medical's rights issue and lost all his money. I have not heard from him in a long time.

Calvin said...

Hi AK71,

Nice, I picked up the rights as well since it was looking quite attractive. The arbitrage definitely makes sense if you have a large enough number of mother shares.

How does one lose all his money at the ATM? The rights simply expire worthless right? To be safe, one can also get a cashier's order and go to the CDP to get it endorsed.

Rgds,
Calvin
http://www.investinpassiveincome.com

Anonymous said...

Yes. I do remember the incident sometime ago. That is why I was very hesitant to do what I did. But the difference was too tempting.

Cheers

CSTan

AK71 said...

Hi Calvin,

It was a long time ago but readers from the early days of my blog would remember the case as the affected person was really upset and shared his experience here in my blog. I think he lost a total of $60K.

Apparently, at the ATM, he keyed in under "Excess Rights" for the nil-paid rights he bought. He called his broker, CDP and even Healthway Medical's management but to no avail.

I believe he also sought the help of Mr. Tan Kin Lian who promptly used it as an example of how risky investing in the stock market could be.

AK71 said...

Hi CS,

We just have to be very careful to key in correctly at the ATM.

I was trying hard to remember the name of the person who lost his money for Healthway's rights issue. Just came to me: Kingston.

I hope he is doing well now.

Edward said...

Thanks AK71. Your postings are interesting. You are the expert in REITs and i would like to get your advice on 2 points:

1) We get the extra $1.06c div buying the mother cum rights, but do we also get (est. $0.7c) extra div paid in advance because the rights will be issue in early dec (so the "old" shares get extra advance div for Oct-Nov, not just the $1,06c for June-Sept). I bought yesterday at 38.5 when the rights were trading at 6.1c. Sor 38.5 vs 6.1+1.05+0.7+31= 38.86. Of course buying the rights there is the time value of money for 2 weeks and also less brokerage cost buying the rights rather than transacting the whole value on the market. But for my i would still pay a premium for the mother on the market cause i can pledge it with the bank immediately, subscribing to rights, the bank would withdraw cash and takes that value out of my collateral calculation. Still it was cheaper to be the mother yesterday in the late afternoon so a double bonus i thought.

2) This is perhaps a more important point. Yes Lippo is great for low debt, high debt headroom for future acquisitions, 9% div plus Indo middle class, central bank cut rates from 6.5% to 6% etc, etc. but did you know the most of the govt land leases for the malls are actually 20-30 years (they say extendable by another 25 years, but at what cost?). Worse than industrial properties here eg AIMS, Sabana where is the average leasehold for the portfolios range between 40-43 years.

This is my major concern. I would prefer a lower yielding REIT at 7.5-8% with 99 year properties, some even freehold properties mixed into their portfolios.

Interested to hear your thoughts.

Ray said...

Hi AK,

I saw this comment on sreit.reitdata.com
Remember you mentioned that you are more sanguine with industrial reits. Do you think Credit Suisse is too cautious?

"Over in the industrial sector, Credit Suisse warned that perception of industrial Reits’ defensiveness, due to its longer lease tenures is misplaced, citing high industrial rents, and Singapore’s high exposure to the United States and European economies.


Industrial rents have not only surpassed pre-subprime crisis peaks but are at 10-year highs, said Credit Suisse.


‘We expect flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate from hereon due to the oncoming supply pressure (including new supply of decentralised office space)."

Ray said...

Hi experts here...

I am a noob to reit investment. Googled about nil-paid but am not sure how to find the symbol LMIR NP rights are trading under.
Also, how do we subscribe to it in ATM after purchasing these rights?
Do we wait for CDP to send notices?
Any kind soul willing to give a step by step including how to find the symbol these rights are trading under? thanks a mil.

AK71 said...

Hi Edward,

1. I know they do that for share placements. So, all existing unitholders would be distributed income up to the day before the new shares are included in the enlarged capital base. You have made a valid point and it could indeed be the case with this rights issue too. Checking my records, it happened for AIMS AMP Capital Industrial REIT's rights issue but not First REIT's. The exact reason why, I have to admit that I lack the inclination to find out. I have thought of starting a custodian account with a bank for my shares but I decided to keep things simple and since I have zero leverage at the moment, I see little reason to pledge my shares to the banks. So, you have to pardon my ignorance here.

2. As for the relatively short land leases for Indonesian properties, from a very reliable source (i.e. First REIT's managers), we know that it costs merely a few thousand dollars to extend land leases in Indonesia. So, I wouldn't worry about this. :)

Finally, with regards to land leases of properties in REITs, I am not too perturbed simply because the managers will do asset renewals. They will sell older assets and acquire newer assets and, given that the values of real estate are more likely than not to form higher lows and higher highs, it would take very incompetent managers to lose chunks of money.

We have to compare apples with apples. Rather than being disturbed by industrial S-REITs' shorter land leases compared to office properties S-REITs', I would invest based on which property type is likely to do better in the current environment and within that sector, choose the REITs I feel give the best value for money. :)

AK71 said...

Hi Ray,

Credit Suisse probably did their due diligence and there is nothing wrong with being cautious.

If we go back to basics, we know that in a recession, there is more likely than not to be deflation. So, is there going to be a recession? If so, everything will experience a decline in price.

Your question is similar to another reader's question. Look at the lease expiry profiles of the REITs you are invested in.

If there are leases up for renewal in 2012 and 2013, do these form a large part of the lease expiry profile? What kind of decline are we looking at in such an instance?

So, let us say 20% of leases (accounting for 20% of GFA in a homogenous REIT, to keep things simple) were so affected and let us say the rental rates reduced by 10% (which is quite drastic), we would see a grand total reduction of 2% in gross rental income. So, a distribution yield of 10% would become 9.8%.

It is virtually a no brainer whether I should stay invested in industrial property S-REITs, all else remaining equal. ;)

Ray said...

hi AK, if there are leases expiry in 2012, 2013, why is it that rental rate will fall? Sorry if this question sound retarded. I was thinking management would just renew lease or something...

AK71 said...

Hi Ray,

If you are a current unitholder of LMIR, you are entitled to 1 rights per unit. If you have 1,000 units, you have l,000 rights.

You could choose to sell these rights away. Once sold, they are called "nil-paid" rights.

See LippoMalls R (O8ZR).

You could also choose to buy more rights.

You will receive packages from CDP with instructions on what to do if you should own any rights either as an existing unitholder or as a purchaser of rights in the open market. Good luck. :)

Data said...

Interesting to see such an obvious arbitrage opportunity between the shares and the nil-paid rights. Do you think it is because many people are not eager to participate in the rights issue and so are dumping their rights?

Ray said...

Hi AK, thanks for the steps.
1) That's assuming my shares are with CDP but I'm using SCB trading these days due to very low commission. In that case, CDP basically wont be sending us the notices. Do you know whether SCB send similar notice / instruction?

2)I don't own LMIR at the moment. Am just trying to learn how to buy the nil paid rights and then exercise those rights using ATM machines. :)

p.s. thanks for your patience and advise. Veterans like you are God-send to newbies like us :D

AK71 said...

Hi Ray,

I was simply building on Credit Suisse's assumption that asking rents in 2012 and 2013 would reduce due to new supply coming onstream and a softening economy. Leases could thus be negotiated with lower rentals in a tenant friendly market.

This is not an absolute, of course. :)

AK71 said...

Hi Data,

Opportunities for arbitrage happen habitually with rights issue. It happened for Healthway Medical, AIMS AMP Capital Industrial REIT and First REIT in their rights issues too. Why does it happen? Your guess is as good as mine.

AK71 said...

Hi Ray,

I have units of LMIR both in my CDP account as well as a nominee account. The latter is with Kim Eng. My broker at Kim Eng would call me regarding any rights I might have and tell me how much money I would have to send over in order to exercise those rights.

You should check with SCB on how they do it. I can't speak for them, of course. ;)

JTCS said...

1st comment though I've been following your fantastic blog for a long time.

Bought back into LippoMalls at 0.385 and NP rights at 0.56 yesterday too. The former is for possible trade at 0.43, if it doesn't happen I'm happy to keep it too.

Previously bought into LMIR from 0.185 in 2009 but sold off all early this year. Partly cos the distribution amount was erratic.

Currently looks like a good entry price opportunity despite erratic price.

Thanks for the sharing your insightful & helpful thoughts online!

AK71 said...

Hi JTCS,

I also bought more LMIR at 18.5c back then. At that price, the distribution yield was in excess of 20%. Of course, selling earlier this year means that you made a capital gain in excess of 200%. For those who say we cannot get a multi-bagger and high yields at the same time for REITs, this proves them wrong once more. Congratulations!

I am happy to read your maiden comment and I look forward to hearing from you again. :)

Wackqq said...

I am queueing to purchase the rights at 0.044. Hope I get it.

Wackqq said...

I suspect some foreign house would not be able to subscribe to the rights issue and will be selling them. Good time to pick up.

AK71 said...

Hi Wackqq,

Yes, I am accumulating on weakness. Good luck to us all. :)

Mark said...

Hi AK
I do not own any LMIR share. Let's say I bought 1000 unit nil-paid right today, I can just go to atm to pay 31c for the 1000 unit i bought, as well as subscribe excess rights, right?

AK71 said...

Hi Mark,

Yes, you could buy nil-paid rights and later convert these to regular units. I believe CDP will send you a notice to this effect a few days after the rights stop trading.

As for excess rights, I am not sure if only existing unitholders are entitled to apply for these. I guess there is no harm just trying. If you don't get any, you will get your money back. :)

Mark said...

Hi AK71
Thanks for the quick reply. I am tempted to load at currnet price.. I believe u also loaded more? :D

AK71 said...

Hi Mark,

Yes, I bought more rights today at 4.6c. I will continue to accumulate on weakness.

Based on Fibo lines, we could see 4.3c and even 3.8c. Buy more then? You bet. ;)

Ray said...

HI AK,

'Apparently, at the ATM, he keyed in under "Excess Rights" for the nil-paid rights he bought...'

1) which bank ATM can be used to exercise the rights?

2) if "excess rights" is incorrect, then what should we select? Are there any instructions to be found in sgx website?

AK71 said...

Hi Ray,

Usually, all the three local banks' ATMs are used. In rare cases, only two.

Rights bought in the open market are not excess rights. They are nil paid rights.

Excess rights are rights that people do not wish to convert to regular units but did not sell in the market during the trading window, for one reason or another.

Instructions will be given in the package from CDP if we should own any rights.

Temperament said...

Hi AK71,
Longtime no see, how are you?
i visited your blog and i realised what you said about premium of buying Nil-Paid Rights over Mother shares, makes very good sense. i manage to buy 40 lots today(10 lots each for my M-I-L and son). i have been trying to buy into this Reits but without success in the past because of the prices i was not willing to pay.
Many thanks for your "tips"

May i ask you,
Compare to "S CHIPS", is Indonesian Companies comparable? i mean are they better regulated or the same or the worse. It's O. K., i will only take it as your personal's opinion. Nothing more. Nothing less.
Cheers!

NB:
The counter parties who sell to me are DBS Vickers & KIM ENG. Look like they have too many of this type of eggs and they don't want them to hatch into chickens? We may still have a chance to buy this eggs at a lower price.

AK71 said...

Hi Temperament,

Welcome to LMIR. :)

Personally, I would not make sweeping statements about S-chips or Indonesian companies. There are risks to such stereotyping exercises, surely.

I know that Lippo is a huge conglomerate in Indonesia and it is probably as important to the Indonesian economy as Keppel Corporation is to Singapore's economy if not more. I am making this statement from a general impression and is not supported by any numbers, however.

I know that LMIR, generally, is bullet proof and has survived the last crisis better than some. I do have issues with its management but as a significant passive income generator, the REIT has not failed me thus far.

The REIT's management might not be the most brilliant in the S-REIT universe but they are blessed with strong numbers and a strong sponsor. It would take an imbecile to sink this REIT.

I will continue to accumulate on weakness. :)

Ray said...

Hi,

If I purchase LMIR Nil-Paid rights, when is the due date I need to exercise them? is it 24th Nov?

AK71 said...

Hi Ray,

Yes, no later than 24 Nov, iirc. :)

Ray said...

Hi AK,

Can you pls explain the difference between Trading of Rights Entitlements vs Trading of Rights Units?
I saw them in the LMIR rights issue announcement.

snipplet below:

Commencement of trading of Rights Entitlements : 10 November 2011 from 9.00 a.m.

vs

Commencement of trading of Rights Units on the SGXST
: 5 December 2011 from 9.00 a.m.

AK82 said...

Hi AK,
you mentioned after this rights issued, the estimated annualized DPU is 3.26c. I couldn't find announcement from LMIR that they will maintain at this DPU, may i know how to derive?
thanks.

-AK82

Anonymous said...

Hi,

Just wondering if it is a good buy at $0.385 coz I dont understand why some ppl did not go for the nil rights since it will be cheaper.

Any idea?

Calvin said...

Ray,

Do you have a RM with SCB trading? The RM will have to call you to subscribe to the rights. As the SCB hold your stocks in custodian account, you will NOT be able to subscribe through ATM. If you do not have a RM, I recommend you call them up and ask them how to proceed before your rights expire worthless.

Rgds,
Calvin
http://www.investinpassiveincome.com

Mario said...

Hi AK71,

The nil-paid rights prices been on the drop and the price seems to be falling with no end in sight.

What is your thinking on this? It seems to me (with my limited knowledge) that some big player is pushing the price down by selling off the rights. With so many people selling their mother shares to by the rights, someone with plenty of rights must be slling them off?

Hope to hear from you. Thanks.

Mario

AK71 said...

Hi Ray,

Rights entitlements are the rights existing unitholders are entitled to and are trading under "LippoMalls R" now.

Rights units are the units created after rights have been exercised, in this case by paying 31c per right. Rights units are no different from existing units and will trade under "LippoMalls".

AK71 said...

Hi AK82,

I worked this out myself. The workings are in this blog bost:

LMIR: Circular to unitholders.

AK71 said...

Hi Anonymous,

It is 36.5c now. Even better value than if you were to buy at 38.5c. ;)

Is it a good buy? Ask youself if you are happy with an estimated yield of 9% at the price of 36.5c/unit.

Also, the REIT is still trading CD now and you will be entitled to a 1.06c payout. The counter goes XD tomorrow on 16 Nov.

AK71 said...

Hi Mario,

To me, unitholders who either do not want to or cannot exercise the rights they are entitled will sell. How many of such unitholders are there? Seems to be many.

When will the selling stop? I don't know but I will continue buying if the price continues dropping. It already hit a low of 2c by now. How much lower can it go? ;)

Ray said...

Hi Calvin,

Thanks. I already called SCB.
They said a RM will be assigned to me and will contact me. I wonder how long that would take. Worried the rights might lapse if they take too long.

Seems like u r familiar with SCB's procedure. Do you know how long they take to process the rights exercise?

Thanks.

Anonymous said...

Hi AK71
It appears that you have more questions/comments than you can handle. Just to let you know that I am in Reits because of your blog.
Coming here is a routine for me.
Many thanks for your wonderful blog.
Keep it up!!!
Cheers

CSTan

Calvin said...

Ray,

My RM is helping me keep track of my rights as I am a priority banking customer. My RM has already helped me to subscribe for my alloted rights before the mother share went ex-rights. I am still waiting to hear back from him on the rights I bought from the open market.

If you do not get a response in the next one or two days, you should call them again. Maybe going down to the branch may help.

Rgds,
Calvin
http://www.investinpassiveincome.com

AK71 said...

Hi CS,

Thank you for the encouragement and I hope investing in REITs has been rewarding for you. :)

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