One month ago, I wrote two blog post on Lippo Malls Retail Trust (LMIR).
The first post is on their challenging acquisition of Lippo Mall Puri. This would likely be finance by a mixture of debt and equity.
The historical dividend yield, prior to the announcement, was around 10%. This purchase, with income support, is not going to be dividend yield accretive.
Subsequently, some readers have questioned whether we should be using the historical dividend per unit of 2.05 cents in our analysis.
After all, the dividend per unit for the last quarter, if you annualized it, is only 1.20 cents. If we use this DPU, the annualized dividend yield is only 6%.
In my article, I argue that business is rather consistent in Q3 and Q4, and there should not be such a huge change in DPU.
My analysis leads me to conclude that the drop between Q3 to Q4 was due to a huge foreign exchange realized loss.
I think that the dividend would moderate.
And yesterday, LMIR announced their Q1 2019 results and DPU is backed up to 0.55 cents. Annualized it, and we get 2.20 cents.
This is even better! We breached 11% dividend yield.
I think not much was revealed about the reason for the big foreign exchange difference but from the results, things seemed to have gone back to normal.
This was due to an exercise to repatriate excess cash from subsidiaries back to Indonesia.
Lippo Malls have 2 issues in the past year. The first one was the increase in taxes that they have to incur, that used to be borne by their third party service manager. The second was the foreign exchange.
Let us look at the updated figures.
The table above shows LMIR’s updated revenue and net property income in Rupiah. You realize the latest 2019 Q1 figures are not too different from Q2 and Q3 2018. This illustrates the short term stability of the operations.
Next we take a look at the updated SGD figures, including the distributable income and free cash flow.
One thing you would notice is that they are back to pre Q4 2018 levels:
- The Net Property Income is slightly better than Q3 18 (40.5 vs 39.40)
- Distributable income is now back to Q2 2018 levels (16 vs 16.80)
- Operating Cash Flow before Working Capital is back to Q3 2018 levels (37.90 vs 37.44)
We can observe a drastic increase in Realised loss on foreign exchange in Q4 2018. This has gone back down in Q1 2019.
The Currency Exchange Volatility is Here to Stay
How should we look at these currency exchange volatility?
My thinking is that for some reason there was a liquidity crunch somewhere and LMIR have to funnel money back to Indonesia, despite all the prudent hedging planning that they carried out. The Realized loss on foreign exchange, Realized loss/gain on hedging contracts and unrealized gain/loss in hedging contracts was so drastic in Q4 2018.
This gives me the feeling that something forced their hands into throwing the planning aspect out of the window.
Using somewhere close to the annualized Q3 2018 DPU for forward estimation looks to be correct at this point.
Investors should note that despite all the hedging that can be done, no matter how long, if the currency movement is one way ( up or down), at some point, there will be a major tilt in DPU. You cannot run away from it.
Hedging smoothed out volatility does not magically make currency depreciation or appreciation disappear.
For REITs with mainly overseas asset, we should realize that in the past SGD have been very strong, so there is probably a build in 1-2% premiums required to take on these overseas assets.
If a local equivalent REIT yields 5%, and the overseas REIT yields less than 7%, perhaps the REIT is not as attractive versus the local ones. This can be tough to judge.
A more sensible way is to also compare to the risk free 10 year government bond yield for the country.
You could take this off Investing.com World Government Bonds section.
The chart above shows the yield change in the 10 year Indonesian Government bond rate. While SG 10 year is at 2%++, in Indo its closer to 7.6%.
The Bull Case for LMIR
Whatever it is, at a dividend yield of 11%, its hard for Lippo Malls to make dividend yield accretive acquisition.
It certainly means that as shareholders, we have to “eat” Lippo Malls Puri no matter whether it taste nice or not.
There will be the investors that warned us not to buy the high yields. And they might be right to warn that.
But I think it might be more worthwhile for us to investigate what are the conditions that make LMIR a good investment (don’t confuse this with a good stock).
I explain in one article in the past the 3 main factors to think about if you are buying a REIT for a longer term:
- The competency and integrity of the managers of the REIT
- Jobs, Business and Economy
- Valuation of the REIT
And perhaps this is a good template to see what would make LMIR a good long term hold.
If we considered #1, the recent actions done by the Sponsors and Manager does not generate any comfort. There are potential for acquisitions but with the share price at this level and trading at this dividend yield, any purchases are not going to be accretive. The best thing to do is to operate existing malls well to generate confidence, so that the share price can be rated higher.
This is a negative here.
For #2, we would have to see whether there are tailwinds or headwinds for the Indonesia economy, and the retail sector. I am not an expert in this, so am not going to pretend to be one.
I can see a scenario that turns favorable if:
- Economy is in an expansion
- Personal debt levels are reduced, this improves discretionary spending
- The currency gets far stronger due to stronger commodities export
What was a depreciating Rupiah situation turns. The distributable income growth will be great.
Finally for #3, the evaluation has to take into consideration #1 and #2. A 11% yield versus even a 7.6% government bond rate looks great, but if going forward #1 and #2 is not favorable, you wonder if its worth it.
There will be a certain dividend yield you would accept to take on this investment risk. I were in this position I would seriously look whether the economy provides a great tailwind.
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