As most of you know, LippoMalls form a significant portion of my portfolio, see My Singapore Stock Portfolio Early September 2012. So when LippoMalls goes on an acquisition spree, acquiring 6 malls in a month’s time, I would be very concerned with these transactions.
Earlier, I lamented that LippoMalls wasn’t very active in seeking acquisitions and the low leverage meant that it was not very efficient. So now that they are acquiring new properties, people are complaining. Why’s that? That’s due to the showing of a lower pro forma dividend yield post acquisition. Since investors are all about the yield, why would they invest when the yields become lower? We will take a look into these acquisitions later, but firstly let’s look at the pro forma dividend yields.
LippoMalls Pro Forma 2011 Dividend Yield
As we can see from the chart above, 2011 dividend yield drops from 6.23% to 6.11% with the first 4 acquisitions and drop to 5.93% with either Pejaten Village or Binjai Supermall and 5.75% with all acquisitions in.
LippoMalls Pro Forma 6 months June 2012 Dividend Yield
The chart above shows the similar results with Pro Forma 2012 6 months June 2012 yield falling from 7.75% to 7.37% with all the acquisitions in. The announcements do not contain any financial forecasts, so we are relying completely on historical financials. That can be an issue as it does not take into account future earning potential of the mall.
Properties Are Fully Funded by Debt, No Equity Issues Involved
This time round, the properties are fully funded by debt, as opposed to the massive rights issue which took place last year. Leverage ratio goes from about 10% to approximately 28% which is still reasonable compared to other REITs.
LippoMalls Pro Forma Capitalisation Table June 2012
So without equity issues, the shareholders will not get diluted right? So why does DPU yield fall? The reason can be found in the Net Property Income Yields versus the Cost of Debt. The bond issues are 3 year notes $200 mil at 4.88% and 5 year notes $50 mil at 5.875%. So the blended cost of debt is 5.079%.
Now let’s look at the properties to be acquired.
Details of Acquisition Properties
The Net Property Income (NPI) yields can be calculated as 7.36% for Krama Jati Indah, 11.23% for Tamini Square, 5.5% for Palembang Square and 1% for Palembang Square extension. For the other 2 acquisitions, only the total NPI is given and it works out to be able 5.53% ($7 mil/$126.5 mil).
So overall, the blended NPI yield for all the acquisitions should work out to be about 5.92%. Remember also that NPI does not take into account taxes. While SREITs are not taxed at the corporate level, the NPI are taxed for overseas properties. Based on average effective rate of 23% for 2010/2011, the after tax NPI yield would be 4.56%.
After Tax NPI Yields Are Lower Than Borrowing Costs
While interest expenses are generally tax deductible, this is not the case here as the Term Notes are borrowed at the Singapore corporate level where there are no taxes. So if you compare the after tax NPI Yield of 4.56% to the borrowing cost of 5.079%, it is immediately clear why there would be a decrease in DPU since the returns are lower than borrowing cost.
Another contributing factor would be the costs associated with acquisitions and the costs to raise the debt. However, these are only one time costs and would not recur going forward, so they are not that important.
Now the question is why would the Lippo management invest in these properties then? Unless they believe that the properties will contribute eventually. That’s where we look at potential upside.
Potential Upside From the Properties
According to the announcement, the Kramat Jati Indah has income support from the vendor due to the recently completed AEIs. There is little upside to this one as the potential is already priced in with the income support. Tamini Square is already 100% occupied and NPI yield is already at over 11%, so little upside here as well. Palembang Square is at 96.4% occupancy so there seems to be little upside, however it seems to be still undergoing AEI.
For Palembang Square extension though, the NPI is too low at 0.3 since it was just completed. Based on the same rental psf as Palembang Square, the extension should generate about 1.5 mil NPI, so there is tremendous upside from this property alone. Just with this calculation, the after tax NPI yield gets quite close to break even on the borrowing costs. Also compared to other 2, Palembang Square seems to be having much lower NPI psm, so there could be positive rental reversions as well.
Pejaten Village is at 95.2% occupancy and Binjai is at 91.4% occupancy. Hopefully Lippo Malls can increase the occupancy rates for both. Also as the LippoMalls portfolio gets bigger, they could potentially enjoy better economies of scale. Overall after all the analysis, I am no longer too concerned. However, I have been taking profits along the way as LippoMalls has appreciated substantially for me.
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