Lippo Malls REIT (LMIR)

[Nick]

LMIR listed on the Singapore Stock Exchange on 19 November, 2007, Lippo Malls Indonesia Retail Trust is a Singapore-based real estate investment trust with a diversified portfolio of income producing retail and retail-related properties in Indonesia.

It recently announced a massive 1 for 1 rights issue in order to finance acquisition of 2 malls from its sponsor (second acquisition). The deal seems to be financed nearly entirely in equity as the gearing will be reduced from 11% to 7.7%. It also have substantial cash hoard of $100 mil so its current net gearing is low single digit - a rare aspect in a REIT considering it has been around for 4 years.

http://lmir.listedcompany.com/newsroom/2...4861.1.pdf [EGM Slides]

http://lmir.listedcompany.com/newsroom/2...3C5D.1.pdf [3Q Press Release]

The unit price has taken a severe beating over the past few days - plunging significantly from its XR price of 42-43 cents to 37 cents now (with 1.06 cents DPU CD). The rights shares are trading at 3.2 cents (ex price 31.0 cents). Based on the circular, the annualized 1H 2011 DPU will be 3.3 cents Any ideas why the rights shares trading at such a huge discount ?

(Not Vested)

[egghead]

My understanding is that it is the "right" that is traded at 3 cents and not the share.

[Musicwhiz]

There's probably a somewhat logical reason for it, but I find the math rather daunting and thus will pass on this!

[Nick]

My understanding is that it is the "right" that is traded at 3 cents and not the share.

Yup. The rights shares is trading at 2.7 cents now with exercise price of 31 cents so the implied price is 33.7 cents. But the mother share is trading at 37.0 cents (with 1.06 cents DPU CD). So I was wondering why the divergence ?

Is anyone here interested in this REIT haha ?

[egghead]

My understanding: The trading of rights ends on 18-Nov. And the acceptance/exercising of rights share ends on 24-Nov. Given T+3 settlement, I suppose it reflects a certain risk of closing windows. Can't explain otherwise.

---

I forgot to mention that the rights shares likely not entitled to the dividend distribution whereas the mother share is now trading at CD.

[Nick]

Rights shares at 2.1 cents (with 59 mil shares traded) now giving rise to 10% yield while mother share trade at 9.1% yield This REIT was trading at 7.8% yield before the rights issue so it is funny to see its risk profile bumped up ! Is there something we are missing out here...

[cyclone]

About the target acquisitions

Pluit Village :
* BOT tenure expiring in 2025
* NPI Yields – 7.4% (FY2010), 8.5% (1H2011 annualized)

Plaza Medan Fair :
* Operational since 2004 with Build Operate and Transfer (“BOT”) tenure expiring in 2027/28
* NPI yields – 10.8% (FY2010), 7.4% (1H2011 annualized)

Does it mean that the company will only own these two assets until the the expired date ?

If so, by the expired time, the money expended for the properties is just about breakeven and the assets have to be transferred to others. Is this acquisition logical ?

[Nick]

I think its like First REIT HGB assets ? Lease renewal is possible. In First REIT case, they renewed leases at a few thousand dollars. There is no such thing as leasehold/freehold assets in Indonesia.

Circular:

An application has been made for the extension of up to 2032 for the BOT AP3. Following expiration of this additional term, a renewal application may be made. The renewal term is usually for 25 to 30 years, subject to approval by the BOT Grantor. A renewal application for the SHGB should be made, at the latest, 24 months prior to the expiry of the relevant SHGB and the renewed term is subject to the discretion of the BOT Grantor.

[bluechipstamp]

it is funny to see its risk profile bumped up !

Prior to this rights issue, LMIR has traditionally been trading at a P/B of betw 54.37% to 63.83% (NAV = 0.846). If we were to use the average, the P/B would be 59.1%.

The rights proceed of 0.31/sh is going to buy similar properties in Indonesia. I would expect the market to value it at the same discount to book.

If so, the "correct" price after the rights issue should be:

59.1% x (0.846 + 0.31) = 0.683 for every 2 shares.
or 0.3416 per share.

This isn't too far away from the current price (2.3c + 31c). So, valuation hasn't changed, at least from a P/B perspective.

[KopiKat]

Rights shares at 2.1 cents (with 59 mil shares traded) now giving rise to 10% yield while mother share trade at 9.1% yield This REIT was trading at 7.8% yield before the rights issue so it is funny to see its risk profile bumped up ! Is there something we are missing out here...

This trust used to trade at >10% yield (I personally thought it was justifiable due to Political risk as their assets are in Indonesia) but the risk seems to become more acceptable (to the market) from 2010 onwards ie. Price went up and yield came down to <8% just before the rights issue announcement. This is despite the 'M' in LMIR becoming Malls (instead of Mapletree, who sold their stake to Lippo) and the DPU peaked and started declining. Previously, I'd have thought that having Mapletree as a shareholder was giving investors some added confidence, which could have explained for the lower yield.

For me, seeing it going for <8% yield was surprising, given the above. So, I'm not too surprised that it's reverting back to >10% yield.

But, the current prices of the main share and rights shares looks like an arbitrage opportunity to me. If I were holding the mother share, what I'd do is to sell it and buy the rights shares (assuming I want to remain as a shareholder). Looks like no risk to me, but I have not put in all the transaction costs to see whether it's really viable. The transaction cost may be substantial (in % terms) if you are not buying a large enough qty of the rights.

Not vested