Lippo Malls rights offer

Lippo Malls Reit starts marketing for $256 million rights issue

The sponsor, who owns 29.6% of the retail trust, commits to cover the entire issue, should other shareholders choose not to participate.
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Sun Plaza, one of Lippo Malls' properties
<div style="text-align: left;"> Sun Plaza, one of Lippo Malls' properties </div>

Lippo Malls Indonesia Retail Trust, a Singapore-listed real estate investment trust (Reit) that invests in and operates income-producing retail properties in Indonesia, on Monday kicked off a marketing roadshow for a rights issue that aims to raise S$337 million ($256 million).

The one-for-one renounceable offering, which was first announced on Friday last week, comes as Asian stock markets have come under significant selling pressure amid renewed concerns about the impact of a global economic slowdown on the region. The Singapore Straits Times Index has lost 6.6% over the past four sessions and in Hong Kong the Hang Seng Index slumped 9.8% from Friday through Tuesday before being closed for a holiday yesterday.

This suggests that it would have been difficult for Lippo Malls to raise money through a new share issue targeting a broader investor base. The rights issue is coming at a sizeable discount to the closing price last Friday, and given the dilution they will otherwise suffer, at least some of the existing shareholders can be expected to participate in the transaction — especially since the money raised will go towards the acquisition of two shopping malls that are estimated to be accretive in terms of the net property income yield.

Lippo Malls will sell approximately 1.087 billion new units through the rights offering at a price of S$0.31 per share. The price translates into a discount of 42.6% versus Friday’s closing price of S$0.54 and a 27.1% discount versus the theoretical ex-rights price (Terp). The record date for determining the entitlements in the rights issue will be November 4.

The rights issue has strong support from Lippo Malls’ largest shareholder and sponsor, Indonesian property developer Lippo Karawaci, which owns 29.6% of the Reit. Lippo Karawaci has committed not only to take up its own entitlement, but to subscribe for all remaining rights units not taken up by other unitholders. This means Lippo Malls is guaranteed to get its money. It also means that the five banks that are joint mangers for the issue won’t have to underwrite the deal, making it a risk free transaction for them.

In the initial announcement last week, Lippo Malls said the sponsor’s undertaking is a reflection of its long-term commitment to the Reit.

The initial investor reaction was not particularly positive, however. In fact, shareholders dumped the stock, pushing the share price 16.7% lower in the first three days after the announcement. The broader market also dropped, but Lippo Malls did underperform. The selling reduced the offering discount, making the deal less attractive for those who are still pondering whether to participate.

If no minority shareholders were to take up their entitlements, Lippo Karawaci’s stake in the company will increase to 64.8%. The company has secured a waiver from the Singapore securities regulator so that it won’t have to make a mandatory general offer to minority shareholders as a result of such an increase in its holdings. This would otherwise be triggered once its holdings exceeds 30%. However, it also needs approval from shareholders, which it will seek at an extraordinary general meeting on October 20. At the same meeting, shareholders will also get to vote on whether to go ahead with the rights issue and the acquisition of one of the malls, which the Reit is buying from its sponsor.

Lippo announced after the close of trading on Friday that it had agreed to buy the two retail malls, which are located in Jakarta and Medan (Indonesia’s third largest city), at a combined cost of approximately S$388 million. The portion not financed through the rights issue will be covered partly by a drawdown from a S$150 million 30-month term loan that was secured last week, partly from internal cash resources.

The larger of the two properties is the five-storey Pluit Village in Jakarta, which it is buying from entities linked to Lippo Karawaci for Rp1.6 trillion (S$234 million) — a 5.7% discount to the average valuation of the asset. The mall is five years old, but was refurbished in 2009. In 2010, the mall generated a net property income (NPI) yield of 10.8%, which compares with an NPI yield of 7.5% for Lippo Mall’s current portfolio.

The four-storey Plaza Medan Fair is smaller, but is only six years old and has a higher occupancy rate of 91.2%, compared with 78.1% for Pluit Village. Lippo Malls is buying this mall from Asiana Investment for Rp1.05 trillion (S$154 million), which translates into a 4.1% discount to the estimated valuation. Plaza Medan Fair generated an NPI yield of 7.4% last year.

“The proposed acquisitions epitomise our strategy of expanding our portfolio of retail-related properties with malls assets that will generate attractive yields and with capital appreciation potential,” said Viven Sitiabudi, CEO of LMIRT Management, the company that manages the Lippo Malls Reit.

Proforma calculations outlined in a circular issued to shareholders on Monday show that if the Reit had owned the two new properties in the first half this year, its six-month distributable income would have increased by 44%, but its dividend yield would have fallen slightly to 7.11% from 7.47%. The net asset value per unit would also have decreased to 57.53 Singapore cents from 84.59, given the large number of new units to be issued as a result of the rights issue.

She added that the transactions demonstrate the manager’s ability to grow Lippo Malls, both by leveraging on its sponsor’s pipeline of quality retail malls and through third-party transactions. She added that with Lippo Karawaci’s increased investment in the trust, it now has “the momentum required to achieve [its] goal of building a S$4 billion portfolio over the next five years”.

As of the end of June this year, Lippo Malls had a portfolio of eight malls and seven other retail spaces with a net lettable area of close to 400,000 square metres and a valuation of S$1.08 billion.

Shareholders who do not wish to take up their entitlement can sell their nil-paid rights in the market between November 10 and 18. The subscription period will close on November 24.

Bank of America Merrill Lynch, CIMB, Credit Suisse, Standard Chartered and UBS are joint managers for the rights issue. Standard Chartered is also the sole financial adviser with regard to the transaction.

¬ Haymarket Media Limited. All rights reserved.
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