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Lippo Malls Indonesia (LMIR): Not yield accretive acquisitions

I have to do a double take because I thought yesterday’s announcement that Lippo Mall Retail REIT’s purchase of 2 Indonesian shopping mall was the acquisition they made sometime ago. My friend have to inform me that these are more acquisitions.

Announcements here and here

In total, LMIR bought up 6 malls totaling SGD $307 mil. They will be funding the acquisitions by SGD $200mil Notes with interest at 4.88%, SGD $50 mil Notes with interest at 5.875%, new notes under the EMTN program, new loan facilities and cash reserves.

Rational of acquisitions:

  1. Discount to NAV
  2. Enhance Earnings of LMIR Trust
  3. Properties located at strategic locations with high retail traffic
  4. Economies of scale
  5. Diversification of Portfolio

LMIR was yielding 6.7% and have a net debt to asset of 2.8%.

The positive thing about the acquisition is that they are made at discount to latest valuation.

However there were many negatives.

Leveraged Purchases

Usually leverage purchases are good for a stock. In these deals, you borrow cash and you buy assets hoping to earn a spread.

Say you borrow 100 mil at 3% interest and buy a 100 mil asset earning a NPI of 5%. After paying the interest, you get to earn 2%.

As long as debt servicing is not a problem (which many REITs found out the hard way in the great financial crisis of 2008), you can boost your portfolio return.

You can even borrow to do asset enhancements if the internal rate of return is worth it.

Taking a look at LMIR, they will be borrowing at a high interest rate of 5% ++ and the average NPI is around 6% ++ and we haven’t add in the expenses.

No wonder LMIR are indicating that dividend per share will go down!

Distribution yield will fall from 7.75% to 7.37% (strange the figures are higher than my Dividend Stock Tracker figures which are based on historical data)

I have written in a past article that no all placements and rights issues are yield accretive and this is an example. (Read here)

Possibly increase in income potential

In such non yield accretive purchases, one speculation is that the management thinks they can improve the malls just like what Capitamall did.

In such a case, under better management, there could be potential to enhance income through improved occupancy. I don’t see any indication that occupancy is low except for one of the malls at 51% occupancy.

The management might see that certain areas are in infant stages of growth and with development, there can be income potential.

Asset Dumping By Lippo

A more likely scenario Is that parent Lippo Group, which are the property developers, are just dumping these malls to LMIR.

In that case, this is very negative for shareholders.

Conclusion

LMIR have one bug bear that is common with Ascendas India, HPH Trust and the recently listed Religare Health Trust in that they face the home currency depreciating against Singapore dollar, therefore dragging down the DPU.

The trusts will say that they are effectively hedged, but we have seen in the past for LMIR and Ascendas India you cannot effectively do that.

I really hope that this is not the case of Lippo Group dumping stuff to gullible investors. I am getting very cautious on another Lippo affiliated trust First REIT.

Lippo looks like they are destroying value both here and at Auric Pacific. I wonder will they do the same for First REIT and OUE.

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disgruntled unitholder

Friday 22nd of November 2013

Lippo has just did it again.. doing private placement without any advance distribution. What's worse, the new unitholder can enjoy accrued dividend from 1October to the announced date (21 Nov), and the unit price is 5% discount from market rate.

What's left for existing unitholder? this is a seriously f***ed up management....

Kyith

Sunday 24th of November 2013

i am not following hard on this but i thought they say the share holder is not entitled to the distribution.

i have high hopes for this new CEO, who used to right the ship at Pacific Shipping Trust.

Perhaps they see the problem with LMIR is that assets prices in Rupiah while loans are in SGD. This will hit a covernant risk if its not reduced.

Swee Chye

Friday 26th of October 2012

1st Reit so far has been yield accreditive and pretty well managed. OUE can and should unlock its value with Mandarin Gallery and other assets. LMIR has been one of the badly managed undervalue Reit as compared to its NAV due to poor management team, non yield accreditive buys, and almost no asset enhancement unlike FCT

Drizzt

Sunday 28th of October 2012

hi Swee Chye, my views on 1st REIT and LMIR are similar to yours.

ryan

Thursday 25th of October 2012

I think when Palembang Sq and Palembang Sq Extension finish their AEI, the yield is going to get a boost. Putting them aside, it seems that Lippo needs to raise additional 60m to fund the acquisitions. Any indication whether they gonna raise through debts or rights issue?

Drizzt

Sunday 28th of October 2012

hi ryan,

from the looks of it they announced they will be funding it by debts.

Simon

Thursday 25th of October 2012

If LMIRT is turning to this, question is, would you consider dissolving your Lippo holdings... if you have picked up at low prices, especially after rights issue?

Drizzt

Sunday 28th of October 2012

hi Simon, i already dissolve little holdings i have because i wasn't comfortable with the hedging and the risk versus rewards of it.

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