LMIR: Will I subscribe to the rights issue?

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.

Office S-REITs VS Industrial S-REITs (2).

I thought I should share some information which I have taken from CBRE's report in Q2 2011 as I have recently received questions from readers on REITs which derive income from office space rentals in Singapore.

For office space, it is expected that "vacancy levels rises (are) inevitable in the next 6 to 12 months. This is the result of increased levels of new supply coming on-stream in addition to second-hand space returning to the market.

"It is apparent the government has been seeking to bolster office supply to facilitate business expansion and to ensure that operating costs remains competitive vis-à-vis other regional cities. Notably, some 1.84 million sf (GFA) of commercial space could materialise from two newly listed parcels – Marina Bay and Paya Lebar. The quality, quantity and competitive cost of Singapore’s office space over other regional cities positions the city state to attract businesses. With global uncertainty lingering, the test is whether this will boost occupier demand and prove to be a winning formula.

"Looking at the office supply pipeline, approximately 8.4 million sf of space is to be completed from H2 2011 to 2015. The GLS sites awarded in Q2 2011 contributed about 10.0% (834,000 sf) of the total. Along with the confirmed conversion of the Market Street Carpark, a Q2 2011 number of landlords/developers are in the midst of repositioning older office buildings through redevelopment. We anticipate that more supply will emerge in due course with the focus on Core CBD."

Therefore, it is understandable why I am not very sanguine about the prospects of REITs such as Suntec REIT and CCT which are heavily exposed to office space rentals. I am instead more sanguine about industrial space rentals.

"Driven by the limited upcoming supply of hi-tech space in the next few years, monthly rent for hi-tech space rose to $2.75 psf in Q2 2011, up from $2.65 psf in the previous quarter.

"Despite the slowing economic growth, demand for factory and warehouse space remains healthy....

"Monthly rental for factories and warehouses rose during the quarter on the back of continued demand. In Q2 2011, the average monthly rents for factory units rose by $0.10 psf q-o-q to $1.85 psf and $1.50 psf for ground and upper floor units respectively. Meanwhile, the average monthly rent for warehouses also rose by $0.05 psf q-o-q to $1.70 psf for ground units and $1.40 psf for upper floor units.

"During the quarter, the capital values for 60-year leasehold strata-titled factory space increased by about 8.0% q-o-q to $312 psf for ground floor units and $230 psf for upper floor units. The capital values for freehold strata-titled warehouse space increased by a smaller 5.0% q-o-q to $471 psf and $412 psf for ground and upper floor units respectively.

"There is still demand for industrial space. Some companies are scouting for a larger space to consolidate their operations and at the same time expand. As such, we can expect some rental upside in the next half of the year."

I shan't say which industrial property S-REITs I like. I think it is easy enough to guess, is it not?

Read complete report here.

Related posts:
1. Industrial rent forecast strongest for Singapore.
2. Office S-REITs VS Industrial S-REITs.