Lippo Malls REIT (LMIR)

[whlplkps]

$Lippo Malls Tr(D5IU.SI)

Perhaps one should think about the following before considering this REIT:

1) Sponsor seems to be disposing non-accretive/barely accretive assets to the REIT --> Looks like this REIT is just a dumping ground for the sponsor at the expense of the REIT shareholders --> Check out lippo kemang, bali transactions.

2) Rupiah has depreciated more than 10% over the past year (see Bloomberg chart attached) and is still continuing to depreciate --> since income is in rupiah and borrowings in SGD, DPU for this REIT is likely to decrease by more than 10% (Double whammy!)

3) Sponsor (via Manager of REIT) continues to dilute existing shareholders via base fee and performance fee paid via units of this REIT. And since the fees % is pegged to size of assets managed, sponsor/manager continues to be incentivised to acquire assets to expand asset base regardless of whether the assets are value accretive to existing shareholders (Look at the DPU after each acquisition after considering fees, does the DPU increase? At best the DPU remains same)

4) Debt denominated in SGD + pref shares to asset ratio is close to regulatory limit of 45%. The reason why pref shares matters to ordinary shareholders is that pref share owners get priority of distribution over ordinary shareholders, so from the perspective of ordinary shareholders, the pref shares can be considered like debt to company since only after pref shareholders get paid then ordinary shareholders get paid so it is prudent to include pref shares in the debt ratio calculation

5) Take a look at the recent asset purchases over past 3 to 5 years Kemang, Bali etc, all come with Sponsor income support for 3 to 5 years. I.e. Sponsor is propping up the income of these assets artificially. I suspect that Sponsor is doing this to justify the rich price of assets that they are selling to the REIT.

Looking at the above it doesnt seem like the Sponsor's interest are aligned with shareholders of the REIT.

You may argue that Sponsor owns 29% of the REIT so they have substantial skin in the game, however dont forget that the Sponsor makes tonnes of money selling its richly priced assets to the REIT.

[Ray168]

$Lippo Malls Tr(D5IU.SI)

Perhaps one should think about the following before considering this REIT:

1) Sponsor seems to be disposing non-accretive/barely accretive assets to the REIT --> Looks like this REIT is just a dumping ground for the sponsor at the expense of the REIT shareholders --> Check out lippo kemang, bali transactions.

2) Rupiah has depreciated more than 10% over the past year (see Bloomberg chart attached) and is still continuing to depreciate --> since income is in rupiah and borrowings in SGD, DPU for this REIT is likely to decrease by more than 10% (Double whammy!)

3) Sponsor (via Manager of REIT) continues to dilute existing shareholders via base fee and performance fee paid via units of this REIT. And since the fees % is pegged to size of assets managed, sponsor/manager continues to be incentivised to acquire assets to expand asset base regardless of whether the assets are value accretive to existing shareholders (Look at the DPU after each acquisition after considering fees, does the DPU increase? At best the DPU remains same)

4) Debt denominated in SGD + pref shares to asset ratio is close to regulatory limit of 45%. The reason why pref shares matters to ordinary shareholders is that pref share owners get priority of distribution over ordinary shareholders, so from the perspective of ordinary shareholders, the pref shares can be considered like debt to company since only after pref shareholders get paid then ordinary shareholders get paid so it is prudent to include pref shares in the debt ratio calculation

5) Take a look at the recent asset purchases over past 3 to 5 years Kemang, Bali etc, all come with Sponsor income support for 3 to 5 years. I.e. Sponsor is propping up the income of these assets artificially. I suspect that Sponsor is doing this to justify the rich price of assets that they are selling to the REIT.

Looking at the above it doesnt seem like the Sponsor's interest are aligned with shareholders of the REIT.

You may argue that Sponsor owns 29% of the REIT so they have substantial skin in the game, however dont forget that the Sponsor makes tonnes of money selling its richly priced assets to the REIT.

Thanks for putting up the alert.

Just want to comment on point 5. The overall portfolio valuation has increase over the years though some assets has depreciated in value.
For the recent acquisition, is it a outcome of financial engineering? May be yes, may be no. We must look at The Manager track record will they fall into this FE.

[propertyinvestsg]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

[wonghw12]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

The yield can be somewhat artificial:
1. A significant part of the yield (>30%) is due to return of capital. The assets have a short lifespan, yet LMRT continues to dividend out instead of setting aside capital to replenish the property. Sooner or later, LMRT may have to cut dividends and/or do a huge rights issue.
2. Similar to the point raised by whlplkps on the dilution to unitholders, the yield is artificially supported by fees paid in units (which enhanced the yield by about 9%).
3. The yield is really IDR (instead of SGD), so it is not comparable to other REITs. After factoring points #1 and #2, does LMRT still look attractive when 10Y IDR government yields are at 6.6%?

[MINX]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

The yield can be somewhat artificial:
1. A significant part of the yield (>30%) is due to return of capital. The assets have a short lifespan, yet LMRT continues to dividend out instead of setting aside capital to replenish the property. Sooner or later, LMRT may have to cut dividends and/or do a huge rights issue.
2. Similar to the point raised by whlplkps on the dilution to unitholders, the yield is artificially supported by fees paid in units (which enhanced the yield by about 9%).
3. The yield is really IDR (instead of SGD), so it is not comparable to other REITs. After factoring points #1 and #2, does LMRT still look attractive when 10Y IDR government yields are at 6.6%?

From my understanding:
1) Their shopping malls are held under a short land title arrangement, however these land titles can be easily refreshed for a small fee. It is as good as freehold title to quote management. There has also been precedence of easy renewals of such land titles unlike China where there have not been any precedence set.
2) Paying management fees in units is a tool employed by all Reits as a management tool. LMIRT is not the only culprit resorting to such a practice.
3) In S$ terms, It's giving me a dividend yield of 10.7%, that's pretty attractive relative to Sreits 5+ to 6% yield.
By the way, I have a small investment in LMIRT to provide a little extra kick to my dividend returns, hence I take an interest in it...

[wonghw12]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

The yield can be somewhat artificial:
1. A significant part of the yield (>30%) is due to return of capital. The assets have a short lifespan, yet LMRT continues to dividend out instead of setting aside capital to replenish the property. Sooner or later, LMRT may have to cut dividends and/or do a huge rights issue.
2. Similar to the point raised by whlplkps on the dilution to unitholders, the yield is artificially supported by fees paid in units (which enhanced the yield by about 9%).
3. The yield is really IDR (instead of SGD), so it is not comparable to other REITs. After factoring points #1 and #2, does LMRT still look attractive when 10Y IDR government yields are at 6.6%?

From my understanding:
1) Their shopping malls are held under a short land title arrangement, however these land titles can be easily refreshed for a small fee. It is as good as freehold title to quote management. There has also been precedence of easy renewals of such land titles unlike China where there have not been any precedence set.
2) Paying management fees in units is a tool employed by all Reits as a management tool. LMIRT is not the only culprit resorting to such a practice.
By the way, I have a small investment in LMIRT to provide a little extra kick to my dividend returns, hence I take an interest in it...

Note that only Hak Guna titles are nearly 'freehold'. We will see in time if LMRT can refresh their BOT sites for a small fee.

[Stocker]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

The yield can be somewhat artificial:
1. A significant part of the yield (>30%) is due to return of capital. The assets have a short lifespan, yet LMRT continues to dividend out instead of setting aside capital to replenish the property. Sooner or later, LMRT may have to cut dividends and/or do a huge rights issue.
2. Similar to the point raised by whlplkps on the dilution to unitholders, the yield is artificially supported by fees paid in units (which enhanced the yield by about 9%).
3. The yield is really IDR (instead of SGD), so it is not comparable to other REITs. After factoring points #1 and #2, does LMRT still look attractive when 10Y IDR government yields are at 6.6%?

 

Pls help to enlighten what is  ' return of capital ' ?

Is it return of shareholder funds or depreciations ?

Many thanks in advance .

[wonghw12]

All the above points valid - but wondering if anyone will bite given the yield on the higher side? approx 8.5% range thereabouts

The yield can be somewhat artificial:
1. A significant part of the yield (>30%) is due to return of capital. The assets have a short lifespan, yet LMRT continues to dividend out instead of setting aside capital to replenish the property. Sooner or later, LMRT may have to cut dividends and/or do a huge rights issue.
2. Similar to the point raised by whlplkps on the dilution to unitholders, the yield is artificially supported by fees paid in units (which enhanced the yield by about 9%).
3. The yield is really IDR (instead of SGD), so it is not comparable to other REITs. After factoring points #1 and #2, does LMRT still look attractive when 10Y IDR government yields are at 6.6%?

 

Pls help to enlighten what is  ' return of capital ' ?

Is it return of shareholder funds or depreciations ?

Many thanks in advance .

Was waiting for other valuebuddies who might give a better answer. The REITs never made it transparent on how the figure was derived. Such accounting treatments makes a difference for tax purposes for non-residents and individuals though. For me, I believe return of capital is related to the 'depreciation' of the property, which is dependent on lifespan of the property.

[soros]

If you are worrying about " return of capital" , you should attend a seminar on "Reits fundamentals" - a Seminar on 14 th April conducted by Dr Wealth .

Also there is some exhibition/symposium for REITS arranged on 19th May ( cheaper entry fee ) .

[weijian]

I will try an explanation - In general, entities that distribute dividends out of free cash flow, rather than net income (which account for depreciation) consistently, are assuming that they do not need to cater to future capex/lease renewal. So, if a company retains cash for future capex/lease renewals, then we call it "return on capital". If the company distribute everything they have without accounting for future capex/lease renewals, we may call it "return of capital".

A simple example below:

Scenario
Imagine I pay 100 dollars for a 10year lease for a stall to sell durians at the MRT. The depreciation is straight-line and so each year the depreciation is 10 dollars. I just need a knife to open the durians and lets say the knife is free, so the only capital i put in is 100dollars. Every year, after paying tax (yes, i am a honest durian seller) and all other costs (cost of durian from wholesaler, disposing the durian shells and feasting on it myself), i receive net cash of 15dollars per year.


- After 10 years when my lease finishes up, i would have gotten 150dollars of total return but actually 100dollar is my capital. So my "actual profit" is only 50dollars or 5% per year.
- So i calculate returns as 15/100 = 15% --> then 10% is return of capital, 5% is return on capital.
- If i spend all the 15dollars per year, after the 10th year i would end up with no money to renew the lease, then i would have to borrow from someone.
- But lets say i decide that i should set aside money to renew the lease after 10years. Then each year from the 15dollar, i would just spend 5dollar and save the 10dollar. After 10years, i would have "saved" 100dollars to pay for a new lease.