Lippo Malls Indonesia Retail Trust (LMIR)’s Lippo Mall Puri Purchase is Organically Not Accretive in an Obscene Way
- Original Post from Investment Moats

I do not understand this acquisition by LMIR.


They currently have a dividend yield of 10%. Then they proposed to buy this mall which will reduce their dividend yield.


I did some notes for a friend, so I thought I will put it out here.


For those who are invested in real estate investment trusts (REITs), the company not just pays you dividends. Sometimes they do ask for money from you again. And again. So you got to be familiar with all these rights issues, placements, preferential offerings. If you don’t learn about this, better not invest in REITs.


Lippo Malls Indonesia Retail Trust (LMIR) proposed to spend S$430 mil to acquire Lippo Mall Puri, a shopping center located in Jakarta. The shopping center was bought from PT Mandiri Cipta Gemilang, which is an indirectly wholly-owned subsidiary of PT Lippo Karawaci Tbk, the sponsor of LMIR.


What happens is that PT Mandiri developed this shopping center, with 6 apartment towers with a total of 1000 residential units, a school and an office/5 star hotel building. Basically, they build a mini work, live and play environment.


This purchase comes with vendor support. With vendor support, the average valuation is $380 mil. Without its $360 mil.


LMIR will purchase it at S$355 mil.


There is a 5% discount to the appraised value but valuations are often fluid. It is easy to make a purchase look worth it if the valuers give a too optimistic valuation.



The whole acquisition will come up to S$430 mil, inclusive of S$10 mil in AEI.


The property sits on 2 HGB land titles. For more information about HGB land titles and how long are these land titles, you can view this article here.


Purchase is Net Property Income Accretive



LMIR show us that the acquisition is NPI accretive. Since LMIR trades so much below book value, I wonder if we should compare NPI yield.


A comparison of NPI yield shows the attractiveness of the current portfolio of properties versus this new one.


And it does show the merit of this property, relative to its purchase price.


However, with LMIR currently trading at this price, does it make sense to purchase this property?


Sponsor is Supporting the Proposed Acquisitions Rent



The vendor is providing income support because the rental income is not matured yet.


It seems the NPI target may be based in Rupiah, thus they might not be shielded from the depreciating Rupiah versus Singapore Dollar.


2 Different Proposals to Finance the Acquisition


Before the acquisition is approved, the manager proposed a combination of debt and equity raising, to finance this S$430 mil acquisition.


Since this is a related party transaction, shareholders would need to vote in an EGM whether to go ahead with this.


LMIR have proposed 2 different kind of funding:



  1. A 58% to 42% debt to equity funding. $180 mil in equity and $250 mil in debt

  2. A 35% to 65% debt to equity funding. $280 mil in equity and $150 mil in debt


Since LMIR share price is so low, and trading at a 10% dividend yield, equity funding is more expensive than debt funding.


The equity raising would likely be a rights issue based on what is proposed.


In a rights issue, the REIT manager asks you, the existing shareholder, whether you want to increase the number of holdings of LMIR, to help fund this acquisition.


If you choose to, you pay them money to get more units. Whether you are better off, versus not subscribing, depends on whether the acquisition increases your overall dividend yield, based on your old shares plus new shares.


If you do not wish to subscribe, likely you can sell off the rights, which is your right to purchase these additional shares, to another person. These rights will be listed on the stock exchange like a normal share. Typically, it will be called R, or R1 or R2. So the rights of LMIR may be called LMIR R.


Selling off the rights, in theory prevents you from being diluted due to the enlarged equity base.


LMIR provided the following guidance. They show 2 sections and the corresponding dividend per unit (DPU) before and after the acquisition.


From the guidance, the DPU will go down alot from 2.05 cents to 1.61 cents or 1.42 cent if there is Sponsor income support. If without Sponsor income support, the DPU is reduced to 1.37 cents and 1.23 cents respectively.


The conclusion here is that through this way of equity and debt financing, it is not DPU accretive, which means the DPU go down. Thus, if you hold on to your LMIR shares, and do not subscribe to the rights issue, nor sell off your rights in the future, your DPU will go down.


If you choose to subscribe to the rights, like most folks, we do not know if it is dividend yield accretive.


Dividend yield accretive means that the dividend yield after the acquisitions, with the enlarged equity base, is higher than before the acquisition.


So there are 2 different ways of financing. One with higher debt and lower equity. The other one vice versa.


Let us take a look at both ways of financing with the income support from the Sponsor


Financing with Higher Debt than Equity, with Income Support


Here is my trusty rights issue or placement calculator.


How you read it is that notice there are 3 sections:



  1. The current situation for LMIR before the acquisition

  2. How the acquisition is financed (the level of debt and equity)

  3. The aggregate of the acquisition and the current balance sheet


I plugged in LMIR current distributable income, price of $19.9 cents, dividend per unit, its assets, debt and equity in the first section.


LMIR may issue 1500 mil shares at $0.12 and borrow $250 mil.


The rights may be priced at $0.12 or 40% discount.


Notice that the total equity of $1079 mil before the acquisition is higher than LMIR’s figures. This is because my figure includes the perpetual, which LMIR did not include.


The dividend yield before acquisition is 10.5%.


The asset yield of this acquisition is 2.6%. This is the increase in distributable income divided by the total purchase price of $430 mil.


Why is this so low?


LMIR will borrow $250 mil and there is interest expense on that incremental debt that you need to factor in. The yield on equity is closer to 6.2%.


After the acquisition, the ex-rights price (TERP) is $0.17.


The dividend yield fell from 10.5% to 9.29%. The debt to asset went up from 34.28% to 38.56%.


Based on this financing, the acquisition is not dividend yield accretive.


This acquisition makes the shareholders worst of, and increased the risk to the portfolio.


Financing with Higher Equity than Debt, with Income Support



LMIR may issue 2400 mil shares at $0.117 and borrow $150 mil.


The dividend yield before acquisition is 10.5%.


The asset yield of this acquisition is 3.93%, which is slightly higher (less interest expense). The yield on equity is closer to 6.0%, which is lower than the first scheme.


After the acquisition, the ex-rights price is $0.16.


The dividend yield fell from 10.5% to 8.87%. The debt to asset stayed constant at 34.28% to 34.39%.


Based on this financing, the acquisition is not dividend yield accretive.


This financing is more dilutive than the former in terms of dividend yield. However, it maintains gearing.


Financing with Higher Debt than Equity, without Income Support



LMIR may issue 1500 mil shares at $0.12 and borrow $250 mil.


The dividend yield before acquisition is 10.5%.


The asset yield of this acquisition is 0.23%. This is the increase in distributable income divided by the total purchase price of $430 mil.


Why is this so low?


This is even lower because without the income support, this asset barely adds to the distributable income! The yield on equity is 0.55%


After the acquisition, the ex-rights price is $0.17.


Based on this financing, the acquisition is not dividend yield accretive.


The dividend yield fell from 10.5% to 7.93%. The debt to asset went up from 34.28% to 38.56%.


Financing with Higher Equity than Debt, without Income Support



LMIR may issue 2400 mil shares at $0.117 and borrow $150 mil.


The dividend yield before acquisition is 10.5%.


The asset yield of this acquisition is 1.55%, which is slightly higher (less interest expense). The yield on equity is closer to 2.38%, which is lower than the first scheme.


After the acquisition, the ex-rights price is $0.16.


The dividend yield fell from 10.5% to 7.67%. The debt to asset stayed constant at 34.28% to 34.39%.


Based on this financing, the acquisition is not dividend yield accretive.


This financing is more dilutive than the former in terms of dividend yield. However, it maintains gearing.


The Motivations Behind this Purchase


Why did I say this is obscenely not dividend accretive?


If we summarized the 2 kind of financing, you realize that they yielded very low asset yield or yield to equity after interest expense, without the income support.


So that is why the sponsor of LMIR need to provide rental support.


With or without rental support, if you are a shareholder holding the REIT before this announcement, you enjoy a dividend yield of 10%.


After this rights issue, if you subscribed to all the rights you are entitled, your dividend fell from 10% to a range of 8.87% to 9.30%.


Now why would you approve such a purchase?


As a shareholder, I would approve such a purchase if the growth of the rental is like in Hong Kong, where each revision can be like 20%. This means that we are purchasing a quality asset. This justifies why we have to buy it now.


The sponsor is providing rental income support and judging by the figures, its 17% higher than without income support. Based on the current distributable income of $58 mil, this means the rental growth within the next 5 years needs to be around 17% or 3.2% per year.


That looks like a pretty normal hurdle growth rate. If Lippo Mall Puri grows faster than this you got a good asset.


Still, with a dividend yield of 10%, you have to wonder why the manager would buy something that is not immediately accretive.


They could wait until the income stabilized 4 to 5 years later, before purchase.


I think for them, there is never a good time, because



  1. perhaps it will take a long time for the income to stabilized (that will be a worry)

  2. rental earnings will always be volatile (that will be a worry)

  3. the sponsor have to sell to someone, but without a stable income, no one will buy


#3 looks the most probable.


If this is a very attractive asset, they would have sold it to a third party.


The Sponsor need to provide income support, so they will hold back $70 mil. They will receive $354 mil for the sale and they won’t be getting the VAT, land acquisition tax, acquisition costs.


So its still a immediate cash flow of $284 mil. (just not sure what is the construction costs)


Why not Sell a Property and use the proceeds to Buy Back LMIR Shares?


If you look at the calculations the price to book is 0.53 times which is extremely low. But we have to bear in mind the book value includes the perpetuals.


If we take out the perpetuals the book value is $819 mil. LMIR current market capitalization is $569 mil.


The price to book is closer to 0.69 times.


Still it is a discount.


If their property is that undervalued, and they can sell at book value, or even higher, selling one or two properties would create enough cash flow.


Take that cash flow to buy back shares at 10% dividend yield.


That is better than any properties out there.


However, it is not intuitive for a REIT to do that, because



  1. that will reduce management fees, since what they earn is based on distributable income or AUM size

  2. those shopping malls may not be worth at book value, if its not operated by the Sponsor


So these are some of the things to think about if you are a shareholder.


Rights issues and Placement is a competency you need to learn if you purchase REITS.


I have more case study in my REIT Training Center in the Learning about REITs section below. It is free. No upsell. Just to get you level up.


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19 likes
20 comments
enghoung

I tend to avoid those REITs with high gearing ratios, even though they have high yields, knowing that there are higher chances of them asking for placements . Cash calls to me is like you have no intention to stay with this girl for long, but shit, she got pregnant (cash calls), and you're forced to stick with her.

PoonJinSiao

Reply to @enghoung : same here

AllenYip

A very drama company come complete with a as drama CEO. Now that the son took over hopefully less drama and more action.

minx99

Reply to @l0nEr : It's a strategy to give a little more turbo charge to your returns. A high risk, high reward strategy. I adopt it once in a while, selectively...

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l0nEr

I think one big part of your analysis lies in your Dividend Yield, which you said in the first sentence that the dividend yield is 10%.
However, that is a very backward looking dividend yield when some rental support are available and IDR might be higher. If you just use the last quarter dividend of 0.003, then u actually get a forward-looking dividend yield of 6%.
Once you change to a 6% dividend yield, your thesis might change.
I think how accretive the acquisition will be is dependent on the forward looking dividend expectations.

l0nEr

Reply to @Incognito : haha. yeah quite the james.
but to their defense, I don't think they ever said they wanted to delist first reit and lippo mall. they said lippo group wants to support the indonesian government policy of starting their own reits, but the properties could had been coming from their other businesses like matahari etc.

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IAmPatrick

Waiting for first REIT right issues turn, might enter

layers

another case of OUECT

DareDevil

What's not to understand? Their parent needs lots of help.

muhdhazman

I stop reading after the sponsor ask for money ...hehehhehehhe

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