LippoMalls Goes On An Acquisition Spree In October 2012

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.

img lippomall dec 2011 pro forma yield

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.

img LippoMalls Pro Forma June 2012 Yield

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.

img LippoMalls Pro Forma Cap Table

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.

img lippomall 2012 acquisition property details

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.

For more information, you may be interested in:

Results Release of LippoMalls REIT FY2011 – Disappointing Performance or Not?

LippoMall Rights Going At Big Discount

My Singapore Stock Portfolio Early September 2012

Understanding Singapore REITs Part One – REIT Categories

26 Comments on LippoMalls Goes On An Acquisition Spree In October 2012

  1. Great writeup! I too have seen other posts by other investors about their concern with it’s large acquisition and claiming that DPU will fall. However, I still believe there’s room for further growth ahead if the management is able to add value to the new acquisition.

    • Hi Han, thanks! Yes, remember that the numbers are all pro forma. Jun 2012 has already past so there’s really not much reason to focus on them. If they wanted to be more aggressive they could give forecast numbers like what they did during the rights issue. However, the acquisitions are so small they don’t even need shareholder votes to go through.

  2. Awesome analysis! It’s good that S-REIT does not have withholding tax for retail investors, else that would drive the yield even lower.
    I am interested in what you mention about – the economies of scale. In what aspect?

    • Hi LCF, thanks!

      Yes, no withholding taxes for SREIT dividends is a big plus.

      The economies of scale generally comes from having a larger property portfolio, which gives it greater bargaining power with suppliers and service providers.

      Other economies of scale come from relationships with tenants. A manager with large property profile will find it easier to attract large anchor tenants like Matahari, cinemas and so on as compared to individual mall owners. They also get to build new tenant relationships with those in their newly acquired malls.

  3. Hi Calvin,
    I was very reluctant to accumulate lippomall even at the price of 0.34 as I think the yield is still unattractive given the unfavorable yield vs financing cost & risk in indonesia, that the more aquistsition likely to reduce the DPU, that it was best to remain low gearing unless the acquisition is done outside Indonesia (like what the First Reit did) and yet the price is still climbing up back by many analysts. Contrary, it was almost certain that CCT is heading for very favourable rent upswing in year of 2013 & 2014 due to it crisis level passing rent (unless there is a financial perfect storm), there was almost zero Buying call from the analysts even when its price dropped to below 1.10. Now, the Cct price has reached new high and yet we see many analysts switch their position to Buying. I wonder it (analyst report) was done deliberately?
    Ignoring those analysts’ calls has given me a handsome capital appreciation return of more than 40% on MCT, CCT, FCT and MIT, yet sitting comfortably for further upswinging DPU.

    • Hi Casey,

      I believe last year most analysts had buy calls on pretty much most of the REITs like MCT, FCT, CMT, with the exception of office REITs. The high yields from REITs made most sense to investors in a low interest rate environment. The office REITs had mixed calls between neutral to buy, so I won’t say that they are doing it deliberately. There is good reason as office rentals are the most cyclical and have the highest probability of dropping should the market go into downturn. I myself have heavily vested in retail REITs, as they are the most defensive.

      It just happens that the stock market is doing well now, so most of the stocks are on an uptrend. The true quality of the stocks will only show when the market goes into downturn.

  4. Hi Calvin,

    Great write-up. I’m currently looking at Religare Health Trust cause its business is rather defensive and it’s price had fallen quite a bit post IPO. What are your thoughts in it?

    • Hi Z, thanks!

      I have written about Religare before. I generally do not like it as all their assets are in India. It does not have a global footprint. I won’t invest as

      1) I do not understand Indian market 2) Issues with regulations 3) High FX risks – Rupees have depreciated a lot compared to SGD over the past few years, this is due to high Indian inflation of about 8% 4) While the dividend yields look high relative to Singapore dividend stocks, they are not that much higher than Indian government bonds.

  5. Hi, was reading thro the prospectus of religare, do note that up to 40% of assets have 1 issue or another in terms of approval and etc. 1 hospital even have a court case abt hospital built on land not belonging to them. Do read pg 170 of prospectus before investing. Sorry Calvin, think I am out of pt here.

    • Hi Greenrookie, thanks for the info. I didn’t even bother to read the prospectus as I have no interest in it. However, I still think this is good information for those who are still thinking of going in for the “high yields”. Quality of assets is extremely important when looking at trusts and REITs.

  6. Hi Calvin,

    do you think reits are doing well due to sector rotation?

    • Hi Lim, they are doing well as the market is seeking yields in a low interest rate environment. Market is somewhat optimistic, but cautious so you see defensives doing very well.

  7. Calvin, with the recent drop in Sembcorp Ind price, is it an attractive buy now? Or is it no longer attractive due to the drop in Sembcorp Marine’s profits?

    • Hi Michelle, it certainly looks somewhat attractive. However, from a historical valuation point of view, I would wait for it to drop further as it still has a large cyclical component.

  8. Hi Calvin,
    Just to digress abit, it seems that Mapletreecom Trust is paying its manager by issuing new shares up to 50% of the payment amount due every quarter, and these shares are issued at a discounted price from the prevailing traded price. This will cause dilution, no?
    Do you think such a payment practice is detrimental to share holder’s interests? Would it not be better to pay them in cash?

    • Hi Mich, yes it will certainly cause dilution. However it is quite usual for REITs to pay out management fees in cash/units. It really depends on the management. The price is not discounted, it is usually based on the weighted average stock for last 10 days or 30 days.

      I don’t think it is all that bad as by giving the fees in partial equity partial cash instead of all cash actually does help to keep the REIT manager aligned with the shareholder interests as they would want the unit prices to go up.

      • Hi Calvin,
        Thanks for explaining things to me.
        I understand that when we buy a reit, we should always try to buy it at a discount to NAV, at what discount rate would you usually consider a reit a good buy?

        • Hi Mich, discount to NAV is just one metric, but it is not the most the important metric in my opinion. Back then I was buying CMT at a premium to NAV, but I consider it cheap due to its superior ability to extract NPI yield. Some REITs are always trading at discount to NAV like Suntec REIT, so I would prefer to look at other factors.

          • Hi Calvin,
            What would be the important metrics to consider when buying a Reit? I would consider dividend yield, gearing and discount to NAV.
            Why do some Reits always trade at discount to NAV?
            Would you recommend one to invest in Saizen reit?

          • Hi Mich, yes those are some of the metrics to look at. You also have to consider factors like debt costs, debt maturity profile, NPI yields, AEI pipeline etc.

            There are many reasons for REITs to always trade at discount, some of the reasons being poor NPI yield and aggressive valuations.

            Personally, I do not like investing in residential REITs due to the high tenant turnover.

  9. Hi, do you see sembcorp industries as a growth stock? The company can only gets bigger and stronger? If this is the case, opportunities for investing in this counter is near?

    • Hi KP, sembcorp is indeed a growth stock. I would be interested to enter the stock if the dividend yield hits at least 5% or more. Since it is somewhat cyclical due to sembmarine, I will wait for the economy to be in worse shape.

  10. Hi,

    QAF reported it’s 3Q results recently. what do you think about the valuation of the stock?

    • Hi Lim, revenue has dropped somewhat and net profit has dropped substantially, I will take a look to see if it is a post worth writing on. One quarter results does not dictate how it will perform in future, but close monitoring will be necessary that this trend does not persist.

  11. Hi Calvin,
    I am looking at three healthcare related REIT. There are First REIT@0.98, PLife@2.12, and IHH@1.24 of Nov 16. Which one is of better value?

    • Hi Lumin, only First REIT and Parkway Life are REITs. IHH is not a REIT.

      First REIT has higher dividend yield than Parkway Life and is cheaper in valuation generally, however the assets of First REIT are mostly in Indonesia with some in Singapore. Parkway Life has hospitals in Singapore/Malaysia and nursing homes in Japan.

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