Lippo Malls REIT (LMIR)

PLACEMENT OF BETWEEN 243,902,000 AND 246,913,000 NEW UNITS (THE “NEW UNITS”) IN LIPPO MALLS INDONESIA RETAIL TRUST (“LMIR TRUST”) AT AN ISSUE PRICE OF BETWEEN S$0.405 AND S$0.410 PER NEW UNIT TO RAISE GROSS PROCEEDS OF APPROXIMATELY S$100.0 MILLION

http://infopub.sgx.com/FileOpen/LMIRT_La...eID=265262

(Not Vested)

Selling on the cheap? Why? If prospect is so good as claim, why sell cheaper?

My take is this is likely a prelude to a public relations exercise to present an upcoming acquisition in the horizon in a more palatable fashion. It is an old trick first used in Starhill Global.

With the current depressed unit price, any raising of capital through a combination of equity and debt will inevitably increase WACC significantly due to the current high cost of equity. Under normal circumstances, a REIT would prefer to announce both financing and acquisition together to provide visibility on the use of funds and also to signal the DPU accretive nature of such an acquisition.

Unfortunately, given the current situation where placement being raised at a cost hovering at around 8.5%(Gross proceeds) or 8.9% (Nett after deducting expenses), even with a good doleful of debt it’s going to bring down WACC to at most 7.5% without severely affecting leverage. This will mean that said acquisition will need to provide a NPI Yield of at least 7.8% post-asset management fee and around 8.8% pre-fee in order for the acquisition to make sense on the outset, so we are looking at gross rental cap rates in excess of 9.5%. There’s also a need to provide for some buffer further to enter into a currency swap to maintain stability in light of the poor IDR performance.

That is extremely unlikely from the looks of things - I doubt Lippo will offload their malls to LMIR at such high capitalization rates so some PR cum IB has probably decided a far better way is to first announce an equity raising to bring down DPU and increase dilution. Wait for the storm and complains to pass by for half a year, then announce your intended acquisition. By then money raised is simply sitting around doing nothing that any acquisition at whatever terms will allow the manager to boast of a good DPU accretion.

This is the same trick used by Starhill Global, they announced a rights issue in the midst of a crisis when they first took over from Macquarie for no particular reason except to par down debt which was not even high and eminent in the first place. Existing unitholders will first suffer a massive dilution, but some time down the road after the "costs" have faded from memories, all the subsequent acquisitions like the 2 YTL Malaysia malls and the 2 Aussie malls all look extremely DPU accretive. Who then is going to argue against such “fantastic” offers?

***Corrected some numbers upon further thought***

Strange, how can LippoMalls do private placement without any advance distribution? Doesn't this mean that new investor is entitled to same distribution with existing shareholder? Isn't this unfair? that they came in on 29 November and enjoy full quarter of distrubution?

(22-11-2013, 09:39 AM)sentosaubin Wrote: Strange, how can LippoMalls do private placement without any advance distribution? Doesn't this mean that new investor is entitled to same distribution with existing shareholder? Isn't this unfair? that they came in on 29 November and enjoy full quarter of distrubution?

pLacement to investors not closed yet. Unlike. Sabana lighting deal. It will be announced later

dudez... read the announcement. It will be ranked the same as existing shareholder.
That means they enjoy the same dividend as existing unitholder, which is unfair.

STATUS OF THE NEW UNITS
The indicative date of trading of the New Units on the SGX-ST will be on or around 29 November 2013.
The New Units will, upon issue and allotment, rank pari passu in all respects with the Units in issue on the day immediately prior to the date on which the New Units are issued (the “Existing Units”), including the right to all distributions accruing from 1 October 2013.
For the avoidance of doubt, the New Units will not be entitled to participate in the distribution of any distributable income accrued by LMIR Trust for the period from 1 July 2013 to 30 September 2013. Upon issue and allotment, the New Units will be entitled to participate in LMIR Trust’s distributable income for the period starting from 1 October 2013

For private placement doesnt matter much if cum dividends or not example a $1.00 reit paying out 1 cent distribution. If placement at 10% discount, private investor may pay 0.90 if no entitled to the 1c payout and they would pay 91c if they are entitled for the 1c payout. In short in the placement bidding is market efficient. If the private investor is paying 91 cents the 1c payout is like return back their own money to them, whether cum or no cum distribution they still pay 90 cents. Got it?

You are only looking at new investor point of view. To existing unitholder, of course it matters.

Existing unitholder get their "distribution (from 1 October to 21 November)" cut by 10% in one night because new unitholder enjoy a distribution from 1 October as well.

(22-11-2013, 10:16 AM)felixleong Wrote: For private placement doesnt matter much if cum dividends or not example a $1.00 reit paying out 1 cent distribution. If placement at 10% discount, private investor may pay 0.90 if no entitled to the 1c payout and they would pay 91c if they are entitled for the 1c payout. In short in the placement bidding is market efficient.

(22-11-2013, 10:19 AM)sentosaubin Wrote: You are only looking at new investor point of view. To existing unitholder, of course it matters.

Existing unitholder get their "distribution (from 1 October to 21 November)" cut by 10% in one night because new unitholder enjoy a distribution from 1 October as well.

(22-11-2013, 10:16 AM)felixleong Wrote: For private placement doesnt matter much if cum dividends or not example a $1.00 reit paying out 1 cent distribution. If placement at 10% discount, private investor may pay 0.90 if no entitled to the 1c payout and they would pay 91c if they are entitled for the 1c payout. In short in the placement bidding is market efficient.

I believe what Felix is trying to say is that the estimated distribution potential for Q4 has already been taken into account in the pricing of the placements.

Mathematically if one can price out the new units at a premium that covers the early dilution of Q4 distributions, existing unitholders are no better or worse off as the pricing premium will just be treated as being retained cash instead of being distributed out to existing unitholders.

Of course if there is, and how much, of this premium is encapsulated in the $0.405 price is a matter of individual judgement that cannot be authoritatively determined in the absence of a control scenario where placement is done without the accrual of the first 2 months of distributions in Q4.

Personally, I think this is a 'defensive' move by the Management in light of the volatile SGD/IDR rates which could easily distort its financial ratios and covenants in a flash. While it is possible to hedge the income stream, I am not certain if it is possible to hedge the property valuation or the debt principal.

2Q 2013

Inv Properties: 1,765 million
Debt: 462 million
Cash: 143 million
Gearing: 26%

3Q 2013

Inv Properties: 1,508 million
Debt: 464 million
Cash: 127 million
Gearing: 31%

It seems that the gearing rose dramatically as the property values were adjusted due to translation effect. I am curious whether will we see an increase in property valuation in 4Q 2013 by the valuers since properties are meant to be good inflation hedge ? What do buddies think ?

(Not Vested)