Is Lippo Malls Indonesia Retail Trust’s Latest Property Purchase a Winner?

Yesterday, Lippo Malls Indonesia Retail Trust (SGX: D5IU), a real estate investment trust focused on Indonesia-based retail properties, proposed a new acquisition.

In the announcement, the trust also recommended that the purchase be partially funded by an equity fund raising exercise which might potentially dilute existing unit-holders’ stake in the trust by up to 12%. Given the extent of dilution, does this acquisition make sense for unit-holders?

The mall

The mall in question is the Lippo Mall Kemang, a five-storey shopping centre located within the Kemang Village Integrated Development in South Jakarta, Indonesia. The mall brands itself as an “Everyday Mall” for middle and middle-upper class consumers staying in South Jakarta and Jakarta itself.

The mall is a matured asset with an occupancy rate of 92.8% as of 30 June 2014. Lippo Malls Indonesia Retail Trust’s Manager sees the purchase as a good opportunity to increase the net property income of the trust. In addition, the Manager also thinks that economies of scale and synergies can be achieved with the purchase given that the REIT’s other properties consist mostly of other retail malls in Indonesia as well.

How it’s funded

The purchase price for Lippo Mall Kemang has been set at Rp 3,600 billion (around S$385.7 million). It is to be noted that the purchase is considered a related party transaction as the current owner of the mall, PT AP, is a corporation that is 92%-owned by the sponsor of Lippo Malls Indonesia Retail Trust.

Any fears of Lippo Malls Indonesia Retail Trust overpaying for the property though, are slightly allayed as Lippo Mall Kemang was actually independently appraised by two different firms. And as it turns out, the purchase price is slightly lower than the valuation figures given by the two appraisal firms.

The total acquisition cost is estimated to be S$397 million after factoring in all kinds of related fees. Lippo Malls Indonesia Retail Trust has proposed to pay for the purchase with S$340.7 million in cash and S$45 million in additional issued units.

However, to satisfy part of the cash portion of the transaction, the REIT would be looking to issue up to 301.369 million new shares at a price which is yet to be determined. The REIT would use debt and existing cash resources to make up the rest of the S$340.7 million which is not covered by the equity fund raising exercise. The new units to be issued represents 12.2% of the REIT’s current unit-count, as alluded to earlier – this represents significant dilution of existing unit-holders’ stake in the REIT.

But despite the dilutive effects of issuing new units, pro forma financials for Lippo Malls Indonesia Retail Trust for the whole of 2013 showed an increase in distributions per unit (DPU) from 3.25 Singapore cents to 3.34 Singapore cents as a result of the acquisition. From the perspective of wanting to gain a higher DPU, the purchase of Lippo Malls Kemang thus seems to make sense for current unit-holders.

Foolish Summary

What else should unit-holders of Lippo Malls Indonesia Retail Trust look out for? Firstly, unit-holders need to ensure that the net property income coming from the new mall is sustainable. Secondly, it would be ideal if the mall has no need for any major capital expenditures in the near future. Lastly, unit-holders would need to keep an eye on the eventual number of new units to be issued by the REIT to fund the acquisition – it should not be higher than the REIT’s current estimates.

If any of the three factors I mentioned immediately above is not fulfilled, the deal might end up costing more capital for the REIT than first expected – this would reduce the attractiveness of the Lippo Mall Kemang purchase.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.