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Are Lippo Malls Indonesia Retail Trust’s Latest Acquisitions a Smart Move for Its Investors?

Lippo Malls Indonesia Retail Trust (SGX: D5IU), the only real estate investment trust in Singapore focusing on retail properties in Indonesia, announced two acquisitions earlier today.

Will these new acquisitions be beneficial to Lippo Malls Indonesia Retail Trust’s unitholders?

Lippo Plaza Batu

The first proposed acquisition is a small retail mall, Lippo Plaza Batu, that’s located in Batu City, a small city seated in the province of Malang in East Java with a population of about 190,000.

The acquisition includes the right for Lippo Malls Indonesia Retail Trust to build an additional 6,500 square metres of net lettable area on the roof of the mall as part on-going asset enhancement works. The new space is substantial given that Lippo Plaza Batu has an existing net lettable area of 12,324 sqm.

Lippo Malls Indonesia Retail Trust is looking to acquire the mall for around IDR265 billion (around S$26.8 million).

Palembang Icon

The second acquisition is of Palembang Icon, a 35,797 sqm retail mall that’s equipped with a sports centre and which is located in the City of Palembang in South Sumatera.

Palembang is the second largest city in Sumatera after Medan, with a population of close to 2 million people. The acquisition of Palembang Icon will cost Lippo Malls Indonesia Retail Trust roughly IDR790 million (S$80 million).

Funding

Lippo Malls Indonesia Retail Trust is planning to fund the two acquisitions with a combination of its internal cash resources, debt, and the issue of new units of itself as currency.

As alluded to earlier, the REIT’s looking to spend around S$110.8 million in total (including all related-expenses) for the two acquisitions. S$81.8 million of that sum will be funded with cash (internal cash and cash from borrowings) with the remaining S$25 million to come from the issuance of new units.

If Lippo Malls Indonesia Retail Trust is issuing S$25 million worth of new units of itself at a price of S$0.37 each to fund the acquisitions, then its aggregate leverage ratio would increase from 31.6% currently to 33.4%. But regardless of the eventual quantum of increase in the REIT’s leverage ratio, the figure will still be way below the 60% limit that’s specified under current regulations governing REITs listed in Singapoore.

Effects to unitholders

The good news for unitholders is that the acquisition might improve the REIT’s distributions on a per unit basis. Based on Lippo Malls Indonesia Retail Trust’s own calculations of the pro forma effects of the acquisitions, there’s a slight 1.3% increase in the REIT’s distributions per unit (DPU) from 0.79 Singapore cents to 0.80 cents for the three months ended 31 march 2015.

But while the growth in DPU is a good thing, the REIT’s net asset value on a pro forma basis may be reduced from 41.71 cents originally to 41.52 cents as a result of the new units in issue.

Foolish Summary

As we’ve seen, Lippo Malls Indonesia Retail Trust’s latest acquisition can benefit its unitholders through a slightly higher DPU.

But, the increase in the distribution comes with a price in the form of a higher leverage ratio and a dip in the REIT’s net asset value; the former may result in the REIT having to face more financial risks while the latter sees the REIT lose some economic value.

It remains to be seen if the acquisition can really benefit Lippo Malls Indonesia Retail Trust’s investors over the long term.

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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.