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LMIR: More benefits from acquiring 4 malls?

Thursday, October 11, 2012

Since its rights issue last year in December, expectation was for LMIR to acquire more shopping malls to improve its DPU which has been rather disappointing, being much lower, post rights issue, than initially expected. With my investment in LMIR some 200% bigger than it was, pre rights issue, I am naturally concerned with its underperformance.



Finally, an announcement to acquire 4 malls at a discount to their respective valuations. The 4 malls are:

1. Palembang Square for S$ 74.8m
(19.9% discount to valuation)

2. Palembang Square Extension for S$ 29.8m
(4.5% discount to valuation)

3. Tamini Square for S$ 30.1m
(23.4% discount to valuation)

4. Kramat Jadi Indah Plaza for S$70.8m
(2.2% discount to valuation)

The acquisitions will be funded fully by debt. Weighted average interest rate: 5.079% per annum. See note at the end of this blog post.

One question now on unit holders' minds is probably how much more are we going to get in DPU, post acquisitions. After all, we are investing for income.

1Q 2012, we received a DPU of 0.69c.
2Q 2012, we received a DPU of 0.79c.

Both distributions were lower than the estimation of 0.815c per quarter, post rights. They were definitely lower than the DPU of approximately 1c per quarter, pre rights.

So, will DPU improve after these latest acquisitions?

Net Property Income (NPI) yields for the 4 properties are: 4.41%, 1.00%, 8.637% and 7.2%. Collectively, the NPI yield of these 4 acquisitions is less than 6.00%.

If I remember correctly, LMIR's portfolio's NPI yield is about 7.5%.  So, these acquisitions are not NPI yield accretive. They are, in fact, regressive.

However, the management of LMIR is going to get a performance fee because in terms of absolute NPI, there will be additional NPI after the acquisitions. Fee? Some 613,158 new units in LMIR will be issued for this purpose. This fee is payable even though the pro forma numbers show that the distributable income will suffer a decline, post acquisitions.

Of the 4 malls being acquired, 2 malls have occupancy rates of under 90%. If the management is able to boost occupancy to above 90% over time, it could make a marginal improvement to the pro forma numbers. It wouldn't be anything to shout about.

It should, therefore, come as no surprise that in the five benefits of the acquisitions listed by the management, none refers to any improvement in income distribution which, probably, matters most to ordinary unit holders like me investing for income.

See announcement: here.

Note: The Manager proposes to finance the Acquisitions from the proceeds raised from the issuance of the S$200,000,000 4.88% Notes due 2015 and S$50,000,000 5.875% Notes due 2017.

20 comments:

TTTTT said...

KJI : 5.1/69.3. 50.8% occupancy. 7.36% NPI yield (with rental guarantee)

Palembang : 3.3/59.9. 96.4% occupancy. 5.5% NPI yield.

Pal extension : 0.3/28.4. 85.3% occupancy. 1.06% NPI yield.

Tamini : 2.6/23.1. 100% occupancy. 11.3% NPI yield.

Total NPI Yield : 11.3/180.7. 6.25%
WACC : 5.079%

Professional Fees : 1.6 Mil
Underwriting for MTN : 4 Mil
Acquisition Fees : 1.8 Mil
Total : 7.4 Mil or 4.1% of Total Purchased Price.

This is why pro-forma DPU for Y2011 will be reduced by ~1.85% had it been acquired last year. 4.8% drop for pro-forma 6M ended Jun 2012.

Incidentally, 10Y IDR Gov Bonds is 5.82%. Using 0.79c annualized, LMIR is at 6.65%. LMIR, unlike First Reit also suffers from the full effect of IDR/SGD if i'm not mistaken.

However the price of LMIR has gone up since then. Probably padding in order to make the acquisitions more palatable?

iisterry said...

Sorry, wierd name appeared on previous posting.

-iisterry

AK71 said...

Hi TTTTT,

When I was going through the numbers, I was wondering if I could have left something out.

Thanks for weighing in with the correct numbers, taking into consideration the discounts and the rental guarantee. Looks a bit better but even an NPI yield of 6.25% is still not NPI yield accretive.

LMIR's management practices a 100% forex hedge against the S$. In the past when the Rupiah was stronger, due to the 100% forex hedge, LMIR actually lost lots of money, money which could have been distributed to unit holders if it had not practised a 100% hedge.

A DPU of 0.79c would mean keeping the status quo from the last quarter in terms of income for unit holders. The immediate beneficiaries of the acquisitions would be people involved in the transaction.

For sure, the acquisitions are not attractive to me as a unit holder. Rather disappointing.

AK71 said...

Hi iisterry,

Weird name? Er... I don't understand. O_o

talesteller said...

Hi AK, as a fellow LMIR investor, I am quite disappointed by the expected drop in DPU as well. In fact, I just posted my thoughts on the acquisitions too.

I had thought the decrease in DPU was due to the interest expense though, guess I was wrong on that count.

iisterry said...

Oh its posted by me. Not familiar with all the blog accounts. It showed up as TTTTT.

I believe the coming quarters should see a reduction in DPU.

1) Interests payable on the MTN.
2) Acquisition costs, underwriting fees, etc once it kicks in.
3) Rental support on their previous purchases should be expiring some time this year or next I believe.

Going through the history of LMIR, they have quite a volatile DPU history since listing.

Put into contrast with First Reit, it appears much weaker. I still remember the conduct of FR's right issue some time back.

At current levels, I feel that it is sufficiently valued and might see some weakness once the next few Q DPU is out.

LMIR previous rights issue was a bad taste for shareholders too, though it provided a great opportunity when the rights was priced at 2+c.

-Still vested but pared down.

AK71 said...

Hi talesteller,

A fellow blogger. Pleased to "meet" you. :)

Any acquisition by a REIT that is not DPU accretive while maintaining a robust balance sheet is not good for ordinary unit holders like me. To me, it is quite simple.

Not buying the property in Palembang and its extension would have been a better move. Of course, the manager would be getting less in fees in such an instance.

We are probably paying too much for the Palembang properties.

iisterry said...

HGB & BOT. HGB can be renewed cheaply as shown by FR.

BOT is akin to the structure used by CM Pacific?

I've not looked in-depth into the implications. Incidentally Palembang is under "Build, Operate, Transfer".

AK71 said...

Hi iisterry,

Oh, I see. TTTTT = iisterry. :)

I agree with you that LMIR's management really pales in comparison to First REIT's although they are offsprings of the Lippo family.

In various blog posts on LMIR, I mentioned how I thought the REIT is really bullet proof but the management is quite mediocre for various reasons. I constantly wonder why the CEO is always the same person but the CFO never seem to last for more than a year...

At 48c/unit, its distribution yield would approximate 6.58%. This, I agree, does not look undervalued.

AK71 said...

Hi iisterry,

For BOTs, there is definitely no guarantee that the contracts would be renewed although the contracts are typically renewed.

All the more reason to think that the management could have overpaid for the properties in Palembang with the NPI yields so low.

SnOOpy168 said...

i have to give some benefit of doubt to why these malls where selected - esp not from the sponsor or a related party.

At the back of napkin, after the 5%+ debt & overheads, what is left to distribute.

Perhaps there are some strategic reason that we cannot see from the numbers and google map (i.e. not being there physically to observe).

Again, prior to this announcement. The prices slowly creeped up. As if somebody or group knew and are slowly buying in to avoid detection.


However, at my current avg. cost, I am not complaining about the yield. Nor am i upset with the run up on the prices.

AK71 said...

Hi SnOOpy168,

I like how you choose to use a napkin instead of an envelope. ;p

I am not unhappy with Mr. Market's willingness to pay an increasingly higher price for units of LMIR.

I am, however, unhappy, with the seeming lack of ability on the part of LMIR's managers to create more value for unit holders...

INVS 2.0 said...

Hi Ak71,

Even if it never suggest anything about its DPU, I am hoping for more short/medium-term investors to move on and drive up the prices, so that I can sell for a capital gain. :)

opal said...

Well, until i find a better place to park my money, I will still hold on to my shares.

AK71 said...

Hi INVS 2.0,

I am almost sure that you are already sitting on some nice paper gains. Greedy, greedy. hahaha.. ;)

AK71 said...

Hi opal,

That reasoning is sound and something I personally subscribe to. However, if its unit price should rise to a level I feel is expensive, I could reduce my long position. :)

opal said...

That's a good strategy :)

In your view, how do you rate ARA as reit manager? Am keeping a close look at dynasty reit.

AK71 said...

Hi opal,

I think ARA is a great business. I was invested in ARA briefly as I locked in gains too early.

As for Dynasty REIT, I have not bought anything at IPOs in years. I will keep it that way. I prefer to wait and see how things develop.

However, being denominated in a foreign currency makes it less attractive to me as I have to take in forex movements per transaction. To some, it doesn't matter but it is an irritation to me.

letissier07 said...

Palembang Square extension just opened in Jun 12 so it's NPI of 0,3 million is probably super under-rated. I am estimating it to be about half of Palembang Square (since NLA is about half and rental rate should be around the same since same location) which gives a 5.2% NPI yield. Nothing to shout about but will bring up the total NPI yield to about 6.9%.

AK71 said...

Hi letissier07,

Thanks for sharing this. Indeed, it would hardly make a dent and unitholders get next to nothing out of these acquisitions while the management gets a fat acquisition fee...

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