by: Tam Ging Wien
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Lippo Malls Indonesia Retail Trust (LMIRT) announced on Monday (31-Aug-2020) that it has reached an agreement with PT Mandiri Cipta Gemilang to acquire the strata title units of Lippo Mall Puri at a revised purchase consideration of 3.5 trillion rupiah or approximately S$330.2mil. This represents a discount of 9.47% and 3.47% to the average of the two Independent Valuations with Vendor Support and without Vendor Support, respectively.
PT Mandiri Cipta Gemilang is a wholly-owned subsidiary of the Indonesian developer, conglomerate, and sponsor of LMIRT – Lippo Karawaci.
The acquisition target comprises the retail components of Lippo Mall Puri which is part of the premium St. Moritz Jakarta Integrated Development, the largest mixed-use development in West Jakarta, Indonesia.
Citing the impact of COVID-19 and both buyer and seller has agreed to a 5.4% lower purchase consideration from the original 3.7 trillion rupiah or approximately S$354.7mil.
ProButterfly has previously covered LMIRT’s anticipated acquisition of Lippo Mall Puri in the following articles:
In the various articles, we have expressed concerns with regards to the overhanging over a potential portfolio asset value decline, lower profits raised from its divestment of its Pejaten and Binjai assets and depressed share prices which would necessitate a large share issuance which will likely result in the dilutive impact on DPU should LMIRT proceed with the Lippo Mall Puri acquisition.
The entire acquisition cost (save for the Acquisition Fees) will be financed through a combination of debt financing of up to S$120 million, comprising bank debt and a loan facility from the Vendor and proceeds from a renounceable non-underwritten rights issue of new Units to eligible unitholders of LMIR Trust on a pro rata basis.
Will the acquisition indeed by dilutive? We have run a few scenarios based on percentage discount to the current market price with a base case, upper bound and lower bound scenario.
LMIRT had previously announced that Lippo Mall Puri will be purchased with vendor support where the sponsor will agree to lease certain areas of the mall that is uncommitted on a quarterly basis from the date of Completion to 31 December 2024. Given that the completion of this acquisition is likely to take place in Q4, investors should note that this vendor support is only for a period of 4 years.
The reason for the income vendor is provided in LMIRT’s original announcement in 2019 which I have quoted here; “commenced operations in 2014 and a significant proportion of its leases are still in their first lease term which generally will expire between 2019 and 2020” and “part of St. Moritz development, which will only expected to be completed in 2020”.
This raises the question whether the asset is actually stable and mature? It is usually unwise for REITs to acquire immature or unstablised assets as that may bring about risk to the unitholders. A further risk in the short term, as part of the revised agreement, the vendor support has also been reduced to a target of the NPI of Rp.340.0 billion per year until 2024.
Original Vendor Support Agreement (Source: LMIRT Original Announcement on Acquisition of Lippo Malls Puri)
Revised Vendor Support (Source: LMIRT Announcement on Update on Acquisition of Lippo Malls Puri)
Before proceeding to analyse the impact, it is worth noting that LMIRT has issued a notice of valuation of its entire portfolio. This gives us an estimate on the general impact of valuations on its various assets. The revised valuation was announced by LMIRT on 27-Aug-2020. The lowest revaluation was 8.1% of Lippo Plaza Kendari (Sulawesi) while the asset with the worse decline in valuation was Cibubur Junction (East Jakarta) at 21.6%. On average, the entire portfolio experiences a decline in valuation of 13.4%.
Based on the average and range of decline in the valuation, it is does seem that the lower purchase price of 5.4% appears to be still relatively high.
Armed with this data, we can estimate LMIRT’s NAV and NAV per Unit.
With a total portfolio asset value of S$1,474.8mil and 2,926.8mil units in issue and adjusting based on the proceeds from the sale of Binjai Supermall and Pejaten Village, we estimate that LMIRT’s Net Asset Value (NAV) is approximately S$833.4 and NAV per Unit is approximately S$0.2847.
Based on the current price of 11.6c and with a total unit outstanding at 2,926.8mil brings LMIRT’s market cap to S$339.5. At an acquisition price of S$330.2mil, the entire acquisition would be approximately LMIRT’s current market cap. This would necessitate large amount of unit issuance which would likely result in a heavily dilutive acquisition.
Are they trying to bite off more than they can chew?
Within days after the acquisition was announced, Moody’s Investor Service place LMIRT’s credit rating on review with a potential downgrade to ensue. Quoting Moody’s analyst Tan Junling, "The review for downgrade reflects LMIRT's increasing linkages with Lippo Karawaci, which has a weaker credit profile, in light of the planned acquisition -- whereby Lippo Karawaci's shareholding in LMIRT could increase significantly. In addition, the acquisition comes at a time when LMIRT is already facing heightened liquidity risk and a weak operating environment given coronavirus disruptions, signaling management's growing appetite for risk. There is also the risk that the trust's weakening earnings could lead to a breach of financial covenants in its bank loans in 2020, for which we expect it to obtain waivers from lenders.". The report further mentions that “LMIRT's liquidity is weak.”.
LMIRT right now bears a credit rating of B1 (single B one) from Moody’s with a risk of downgrade to a B2 (single B two) or lower. LMIRT’s parent and sponsor Lippo Karawaci have a credit rating of B3 (single B three).
The lower the REIT’s credit rating, it runs the risk of its lenders and future bond raising activities demanding a higher interest rate for the risk that they are taking leading to higher interest expenses.
LMIRT currently has an interest cover of 3.3x excluding the interest in currently pays on its perpetual securities. It currently pays an interest rate of 6.04% including interest on its perpetual securities.
Is the sponsor selling a high value asset to manage or improve its own credit rating at the expense of its child REIT?
We made several assumptions with regards to our model to come up with some simulated scenarios, among the more notable ones but not limited to:
In our simulated model, we will test the impact on the DPU based on rights issue priced 10%, 20%, 30%, 40% and 50% discount to the current close of Friday, 04-Sep-2020 at S$0.116.
Running the various scenarios, its clear that neither the DPU nor the NAV is going to be accretive. In fact the DPU yield is also going to be dilutive!
LMIRT’s sponsor has provided an irrevocable undertaking to take up its full pro rata stake in the rights issue, and apply for all the excess rights units not taken up by the other unitholders up to 100% of the total number of rights units, subject to a whitewash waiver from the Securities Industry Council. In other words, Lippo Karawaci will be fully underwriting the rights issue.
We think that rights priced between the range of 15% to 45% is quite likely with a 30% as the average case as a possibility. In order to convince unitholders to vote a “yes” to this rights issue, the discount would need to be sufficiently steep. We suspect that any less than 15% discount is unlike to garner sufficient votes. Considering the fact that Lippo Karawaci is underwriting the rights issue, they are likely to want to purchase at a heavily discounted price.
As this acquisition is from the sponsor to the child REIT, it would be considered an interested party transaction, an EOGM would need to be convened to vote on the matter and Lippo Karawaci would not be allowed to vote during the EOGM.
Making many assumptions and estimates and running some simulation on the various discounts offered for the rights issue units, we seem to come to the conclusion that this acquisition is unlikely to be DPU and NAV per Unit accretive. It is also unlikely to be yield accretive.
Hence, we continue to believe that an overhang on the stock will be present until the rights issue details are announced. After that it is likely that the share price may be affected.
The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.
The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.
But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.
Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
Our speaker Tam Ging Wien will be sharing his knowledge and experience including:
Some key highlights that will be covered includes:
During the sharing session, various Singapore-listed REIT examples will be used.
There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.
Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).
The details of the event are as follows:
To learn more about REITs, we recommend the article: What are REITs?
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