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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.
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