by: Tam Ging Wien
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Lippo Malls Indonesia Retail Trust (D5IU.SI, LippoMalls) announced on 30-Dec-2019 (Thursday) that it proposes to divest 2 assets to Nirvana Wastu Pratama, better known as NWP Retail (NWP) – namely Pejaten Village and Binjai Supermall for Rp1,280bil (S$124.3mil). Together with this transaction, NWP is also acquiring another 3 malls directly from entities affiliated with the Lippo Group, Central Plaza in Bandar Lampung on South Sumatra, Duta Plaza in Denpasar on Bali, and Cimanggis Square in Depok, a satellite city of Jakarta on Java from Lippo Malls for a total of Rp440bil (S$42.7mil).
NWP is a Warburg Pincus-backed retail real estate venture in Indonesia together with PT City Retail Developments. Warburg Pincus, a New York-based private equity firm is the same backer as ESR, the sponsor of ESR-REIT and ARA the manager of Suntec REIT, Cache Logistics Trust and ARA US Hospitality Trust. Warburg Pincus is no stranger to the Asian real estate market and with the latest acquisition by NWP, it expands its portfolio in the Indonesia retail market by another 5 malls. It already owns 40 malls in Indonesia prior to this acquisition, some already operational and some under development.
The purchase consideration for Pejaten Village and Binjai Supermall is Rp997.4bil and Rp283.3bil respectively and amounts to a premium of 33.3% and 19.3% over the original purchase considerations. The purchase however is 4.1% and 8.3% discount to their latest valuations of Rp1,040.0bil and Rp309.0bil respectively as at 30-Jun-2019. As a result, the pro form NAV per Unit will fall slightly from 28.66c to 28.05c based on the FY2018 figures – a slight 2.13% fall. Assuming the same corresponding percentage fall, the NAV per Unit based on the Q3-FY2019 figure could fall slightly from 31.2c to betweeen 30.3c to 30.9c.
Not forgetting that in Mar-2019, LippoMalls also announced the acquisition on Lippo Malls Puri, the retail component of the luxurious St. Moritz Jakarta Integrated Development project located in West Jakarta. We previously covered this acquisition in our article last year entitled LippoMalls Indonesia Retail Trust – Watch Out, Potential Dilution Ahead!.
The retail component alone is valued at S$379.7mil for which LippoMalls will be acquiring at a value of S$354.7 – a 6.6% discount to the average valuation of 2 independent valuers. This valuation is based on a 5 year vendor support (income support) until 31-Dec-2023. Without the vendor support, the valuation would be S$359.8 – a 1.42% discount.
Including acquisition cost such as Value Added Taxes (VAT), Acquisition Tax and other expenses, the total outlay required would be S$420.0mil.
Since the announcement in Mar-2019, LippoMalls made a further announcement in Sep-2019 that the acquisition completion date will be extended by one year to 30-Jun-2020 from the from the previous plan to complete the acquisition by 30-Jun-2019. The purchase consideration remains the same.
With one acquisition and two divestments due to be completed by mid-2020, it is hard to understand the overall impact on the REIT for investors. We will attempt to put both transactions together and make an estimate on the net impact on DPU, NAV per Unit and Gearing based on the latest available data as of Q3-2019.
We will make a reasonable assumption that the divestments that will raise at least Rp1,239mil (S$120mil) would be completed first with the funds then used to pay for the acquisition of Lippo Mall Puri. We will also assume all other figures on the balance sheet remain constant.
In our first estimates, we will assume that no equity fund raising (e.g. private placement, rights issue, perpetual securities…etc). Seeing that there is currently S$116.3mil cash on its balance sheet and a further S$120mil cash from the divestment, we will assume that it will use S$220.0mil from this pool to fund the acquisition and the remaining from debt.
After running the figures, we estimate that LippoMalls gearing could be raised to just under 40.0%. We also expect that its total Net Asset Value per Unit could fall from 31.2c to 30.6c.
In our second set of estimations, we will assume that LippoMalls would want to maintain its current gearing below 35.0%. In order to do so, the REIT would need to raise some form of equity fund raising. We will assume that a rights issue will be used, and we simulated 3 issue prices at 19c, 20c and 21c. The higher the issue price, the lower the dilution amount.
After running our numbers, we found that our estimates point to potentially dilutive effects in all 3 issue prices. This is because in order to raise the funds at the current depressed prices, they would need to issue anywhere between 18.5% to 20.5% new shares to raise enough funds to maintain its gearing below 35%.
Estimating the impact on DPU is a lot harder as there are multiple factors at play that we do not have access to. The required breakdowns are also no available and we have no means to know if there will be any dividend policy changes that could be made. We would have to put in many of our own personal gut feel and assumptions in our assumptions.
Therefore, we advise readers that these estimates should only be used as a reference as we cannot accurately make an assessment without full access to all the figures.
Based on the FY2018 annual report of LippoMalls (page 34), we know that Pejaten Village and Binjai Supermall generated a gross rental revenue of S$12.5mil and S$4.3mil respectively while the net property income came in at S$9.6mil and S$2.8mil respectively. This compares to a total of S$230.3mil and S$165.0 of gross rental revenue and net property income for the REIT for the full year FY2018.
In other words, Pejaten Village and Binjai Supermall contributes approximately 5.4% and 1.9% of the gross revenue for FY2018 and 5.8% and 1.7% of the net property income for FY2018.
Taking this as a guide, we would estimate that DPU could fall around 7.5%.
With regards to the acquisition, the forecast NPI is expected to be Rp348.0bil (S$33.8mil) and could potentially add up to 20.5% increase in NPI. Similar to the above, we will make an assumption that the NPI increase would proportionally contribute to the DPU increase. Hence, a rough estimate would be a net gain of 13% DPU.
Giving that the average quarterly DPU for FY2019 is about 0.57c, a 13% net gain in DPU could increase the DPU to about 0.64c ± 5% per quarter if no equity fund raising it used.
However, if LippoMalls decides to raise equity fund and issuing 18.5% extra units, we may also see the same dilutive effects knock the DPU down from 0.57c to 0.54c ± 5% per quarter.
We have previously written about the acquisition of Lippo Mall Puri in our article last year entitled LippoMalls Indonesia Retail Trust – Watch Out, Potential Dilution Ahead! and shared with our readers that the acquisition is likely to be very dilutive both in terms of DPU and NAV per Unit.
In light of new information about the proposed divestment of Pejaten Village and Binjai Supermall, we think that LippoMalls had intentionally delayed completion of the acquisition so that they are able to raise funds from the divestment and not relying solely on the potentially dilutive equity fund raising to fund the acquisition.
After running a non-exhaustive estimation exercise, we found that by using the funds from the divestment to fund the acquisition of Lippo Mall Puri, LippoMalls could potentially avoid a potentially dilutive acquisition but that comes at the expense of its gearing increasing to about 40.0%. If the management chooses to maintain the gearing at around the current 35.0%, it would still need to raise equity fund raising but would be mildly dilutive. Any equity fund raising would likely knock down the share price a little from its already depressed prices, can the management afford to do so?
Overall, we think that it is a prudent move from the management to divest some if its non-core assets and recycle the capital for further acquisitions. This divestment along with another 3 assets would also help to strengthen the sponsor’s balance sheet. Investors would be happy that the acquisition was pushed back to make way for the divestment first.
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