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LMIR: Sell the rights?

Thursday, November 17, 2011

For those who bought some LMIR rights in the fire sale recently, a question could have formed as to whether they should sell the rights and lock in some hefty gains which could be as much as 100%. That it took just two days means it is basically free money since it is within the contra period.

Indeed, from a trading perspective, why not? Traders would say that taking profit is never wrong. If price of the rights were to go higher tomorrow, I could sell some as well since I have accumulated a sizeable long position. Question, at what price? Answer, look to the Fibo lines to see where possible resistance levels are.

Beyond 4.3c, I see stronger resistance at 5.2c and 5.4c. I could do a partial divestment at those prices if they should be tested. In such an instance, I would retain half to two thirds of all the nil-paid rights I bought to convert into regular units as I still believe that at unit prices of 33c to 36.5c, we are getting great value with distribution yields of 9% or more.

Why not just keep all the rights if they are such a bargain? Indeed, I thought of that which is why I would only divest partially if higher resistance levels should be hit. This is to satisfy the trader in me which is shouting out to take profit.

If the higher resistance levels are not tested tomorrow, I will not sell any of the nil paid rights I have accumulated in the last few sessions. This will satisfy the investor in me which thinks that we are seeing compelling value in the rights.

Related post:
LMIR: Why did the rights plunge in price and what did I do?


Ray said...

Hi AK,

Exercised my rights already. I only bought 17,000 lots so not much to sell also :)

Another note: I wonder if you are able to give advice on a particular stock I'm holding. Sent you an email at the sillypore address in your "Contact AK71" link.

If you are ok, kindly check the email there.

Thanks alot.

AK71 said...

Hi Ray,

You have made a speedy decision, I see. :)

I usually look at stocks which I have either a vested or academic interest in. I don't usually look at anything else. Takes up too much time.

If the stock you are asking about happens to be something I am looking at, I will share with you my views. Otherwise, I will pass on it.

I will read your email in a while. :)

Ray said...

Hi AK,

Thanks. I have replied to your reply.

Back to talking about REITs then.
When would you consider selling LMIR shares? When the price rise alot? Or when their balance sheet no longer look healthy?

AK71 said...

Hi Ray,

I like to sell when price goes above fair value. What is fair value? That is a subjective question.

I think an 8% yield from LMIR is fair. So, fair value at this point in time, to me, is about 41c. Things could change in time.

I am investing in LMIR for income. If there should be capital gain, it is a bonus. :)

Ray said...

Hi AK,

So lets say LMIR rise to 41 cents today, that means you will sell it?
But that would mean you are losing the stocks that may fetch you the 9.8x % dividends.
Killing the goose that lays you the golden eggs?

Or do you feel that there will be other undervalued stocks out there and freeing your funds (plus locking in some profit) allow you to buy other stocks?


AK71 said...

Hi Ray,

From a value investor's point of view, he wouldn't sell something at fair value. He would sell at above fair value. ;)

Personally, I like to look at the technicals too. If it looks like price could go higher even if it were above the fair value I have ascribed to it, I might not sell.

Finally, I would look at the yield at current price when deciding whether to sell rather than the price I bought in at. This is something I learn from my experience investing in real estate.

If a particular piece of real estate sees its yield dropping close to 3% or less based on current market price, it is probably time to let go. If we do not look at yields this way, we probably have no intention of ever divesting nor could we know when to divest. ;)

Ray said...

Hi AK,

Its seem easier to cut loss or divest a underperforming investment than to let go one that is performing well.

What I meant is, I understand how you might let go of LMIR for e.g. if its yield drops to lets say an undesirable 5%. However what I find it difficult to decide is whether to let it go if its price rose beyond fair value e.g. 50 cents but its yield is still so attractive at 9.8x%.

It's so difficult to want to have the cake yet eat it!

Wonder how you decide should you be faced with such a dilemma. :)


AK71 said...

Hi Ray,

Well, first, sort out your own feelings. What was your motivation for investing in LMIR? If it was to invest for income, as long as the yield remains attractive even with an increase in unit price, everything else remaining equal, why divest?

If you invested in LMIR with an eye on capital gains, then, you want to look at the technicals and divest when things look toppish.

However, if you are a bit of a trader and investor mixed like I am, then, you might want to divest partially and book a gain if the price has hit a preset target, staying vested in the process.

For the convenience of other readers, here is the link I sent to you earlier:
A trade or an investment?

Know ourselves and we won't be lost. :)

Anonymous said...

There is no reason why you should base the yield on your historical price (which is history). The yield should be computed on present day value and based on that yield, decide whether the investment is still worth it.

Eg -

You buy a REIT for $1.00 per unit and it yields at $0.09 DPU annually. 9% yield is great considering the assets are backed by master leases but it is small cap with a small portfolio so you demand a higher margin of safety. Over the next few months, the price reaches new high of $1.60. You refuse to sell since you believe in your 9% yield. It is superior to other investments like 7% yielding blue chip REITs. Is this correct ?

REIT ABC: $1.00
DPU: 9 cents
Yield: 9%
Dividend Income from $1000 investment: $90

REIT ABC: $1.60
DPU: 9 cents
Yield: 5.6%
Dividend Income from $1000 investment: $90

If you realized that the yield has plunged a great deal, the rational thing would be to sell and use the proceeds to buy something better:

Blue Chip REIT: $1.00
DPU: 6.5 cents
Yield: 6.5%
Dividend Income from $1600 investment: $104

Your dividend income has actually increased DESPITE switching from a 9% yielding investment to a 6.5% yielding investment.

Lesson: Don't look at what you did in the past. Look at the present and in the future.


Informative Blogger said...

I bought today at 3.6 cents and 3.9 cents .....

chan :)

AK71 said...

Hi Nick,

You are really cut out to be a teacher. Haha.. ;)

Well delivered and I couldn't have said it clearer myself.

These days, I am given more to sharing general ideas and leaving the details to be worked out by readers.

Thanks for the detailed comment. Much appreciated, as usual. :)

AK71 said...

Hi Chan,

An average of 3.75c means your rights units would be at approximately 35c (all in cost) per unit.

So, the expected distribution yield of your investment, post rights and acquisitions, is about 9.31%. Congratulations! :)

Ray said...

I get the drift.
Thanks Nick for sharing.

la papillion said...

Hi all,

Hmm, interesting....after commission, it might not be worth the switch. Anyway, there might be practical considerations that you can't invest the extra 600, so not all the capital that is divested can be re-invested. But I'm nick-picking ;)

I'll look at the charts for selling. To balance the need for income and capital realization, I'll sell a portion of it while retaining the other. But if your lot size is small, then this isn't practical too. But at the same time, the income that you get isn't that significant too, so do whatever you like, haha

A practical viewpt :)

AK71 said...

Hi LP,

This discussion has become purely academic since the rights are no longer trading. Haha..

Yes, if we do not hold a significant enough position, it is not practical to do what I proposed. What is significant enough? Hmm.. perhaps 200 lots?

KaySee said...

Hi AK,

Some questions on LMIRT and Sabana which you are holding.

I believed the counter has dropped from the high 0.63 (or thereabout) to 0.54 (prior to rights issue announcement of 0.31). If one to take up the rights, it will be 0.425 per unit.

With its current price of 0.375 and if one were to subscribe to the rights, this is a huge 11.8% down (compare to the meagre 8% or so dividend per year).

The same goes for the Sabana counter you are holding (if I remember correctly you were picking up some at around 0.92 or so). Comparing to the current price of .87 or so, that's also another 6% drop. How do you assess this counter since Sabana constitute one of your lion share.

What's your view on S-REIT (are you still bullish) or confident. Or are you hedging some of it via other means.

Lastly, with the 70+K of dividend collected so far, are you also computing them based on the unrealized loss of counters based on your purchase price or it is purely dividend (without taking into account of unrealized loss/underwater counters).

Thanks for allowing me to understand your thought process.


AK71 said...

Hi Kay See,

Few can see whether prices will continue to fall and fewer can see whether prices have bottomed, at least not until it has happened.

First, sort out our motivations whether we are entering something for a trade or an investment.

My positions in LMIR and Sabana REIT are investments. More specifically, I am investing in these for income. So, I am prepared to hold on to them for years while collecting quarterly income.

I do not look at unrealised losses or gains. As an investor for income, I don't see any real need to do so. What about those units of LMIR I bought at 18c in the last crisis (and this is just one example of me buying low)?

If prices weaken further, everything else remaining constant, I take a look at the charts and if it looks like the downward momentum has petered out, I would buy more. This does not mean prices would not weaken further, of course.

I remain confident in the S-REITs I am vested in but that does not mean that I am bullish about them. I do not believe in being bullish or bearish. I believe in being pragmatic. There would come a time to divest but the time is not now.

How can you tell that I am pragmatic? Well, when LMIR went CR and price was 54c, I did not increase my long position.

Read: LMIR: Will I subscribe to the rights issue?

I only saw compelling value when the rights plunged in price when they started trading. I went in and scooped up nil-paid rights in the open market in the fire sale.

Read: LMIR: Why did the rights plunge in price and what did I do?

Buy when I see value. Will price go lower? I don't know. If anyone knows for sure, please tell me.

As for Sabana, similarly, I waited till price hit a level I felt provided a margin of safety I was comfortable with. Indeed, technically, 92c was a strong support when I got in. Price rebounded back then if you remember. The support eventually broke and unfortunately, I could not have seen that coming. Same thought processes.

If you want to know what I feel about REITs, read the following:

Staying positive on S-REITs.

In summation, read this:

No change to my plan as I plan changes to my life.

What I am comfortable with might not be so for you. It is important to find your own path. :)

Vulcan said...

Hi AK,

I saw the LMIR announcement yesterday (2 Dec 2011) that the rights units subscribed have been issued. Did not see the shares credited into the CDP account this morning (3 Dec 2011 AM) nor have any of the funds been refunded. The newly issued shares are supposed to trade from 5 Dec 2011, Mon... Just want to check if you/any other folks have got the LMIR units credited into the CDP account already? Thanks!

AK71 said...

Hi Vulcan,

I checked last night. No refunds yet. They did say it might take up to 2 weeks but it is usually faster.

As for the rights units, it should be in by Monday. Check again then, I suppose. ;)

Anonymous said...

Hi AK,

I just check my CDP account, right share is in.


AK71 said...

Hi BC,

Thanks for sharing this update. I hope you got all the excess rights you applied for. :)

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