Lippo Malls Indonesia Retail Trust (LMIR; SGX: D5IU) is a Singapore-listed retail REIT with a portfolio of 20 retail malls and seven retail spaces located in Indonesia with a total net lettable area of 851,850 square metres. 10 retail malls and three retail spaces are located in Jakarta alone. LMIR’s properties have over 3,400 tenants and well-known tenants include Carrefour, Zara, H&M, McDonald’s, and Starbucks.
As a rising developing nation and the fourth most populous country in the world, Indonesia’s annual GDP has been growing steadily at 5-6% over the last five years and LMIR as has naturally rode on this growth.
However, as LMIR trades and reports its financial results in Singapore dollars, investors have seen the rupiah weaken from around 7,200 rupiah to 9,600 rupiah against one Singapore dollar over the last five years (though the rupiah did strengthen in 2016).
Can Indonesia’s growth rates mitigate the currency risks faced by LMIR and its investors? I went to its annual meeting to find out more. Here are 12 things I learned from Lippo Malls Indonesia Retail Trust’s 2017 AGM:
1. Gross revenue increased 8.7% year-on year to $188.1 million and net property income (NPI) rose 8.4% to 171.9 million. The rise in revenue and NPI was helped by the acquisition of Lippo Plaza Batu and Palembang Icon in 2015.
2. Distribution per unit increased 10.0% year-on-year to 3.41 cents. Based on LMIR’s closing share price of 37 cents on 30 December 2016, its FY2016 distribution yield is 9.2%. (LMIR’s share price has since risen to 42 cents as of 29 May 2017.) In fact, LMIR’s DPU has grown an impressive 23.6% in just the last two years.
Source: Lippo Malls Indonesia Retail Trust
3. Gearing ratio is at 31.5% as at 31 December 2016. This is below the maximum 45% allowed by regulations which gives LMIR significant debt headroom of around $262 million that could be used for potential acquisitions. However, even though 45% is the maximum gearing allowed, the chairman shared that the management prefers to keep LMIR’s gearing below 40%.
4. Weighted average debt to maturity is on the low side at 2.59 years. However, according to CEO Chan Lie Ling, LMIR has since secured facilities to refinance all debt expiring in 2017 and 70% of LMIR’s borrowings are at fixed interest rates.
5. As at 31 December 2016, LMIR’s portfolio value was worth $1.94 billion. At the meeting Chairman Albert Saychuan Cheok gave an impassioned speech about the growth of LMIR and stated his aim to double its portfolio to $4 billion “sooner rather than later”. To do so, LMIR needs organic growth and to continue acquiring high-quality, yield-accretive properties.
6. LMIR’s sponsor, PT Lippo Karawaci Tbk is the largest public company in Indonesia by total assets and revenue. PT Lippo Karawaci Tbk is a real estate developer in hotels, retail malls, and hospitals. It manages 46 retail malls and plans to develop another 40 more by 2030. This means LMIR has a steady source of potential acquisitions from the sponsor’s pipeline as the REIT has the first right of refusal to acquire its sponsor’s properties. LMIR’s most recent acquisition is Lippo Mall Kuta located in Bali. The mid-size retail mall was purchased for IDR800 billion (approx. S$86.4 million) and currently enjoys an occupancy rate of 96.2%.
7. Portfolio occupancy rate as at 31 December 2016 is 94.3%, which is higher than the industry average of 85.4%. Weighted average lease expiry is 4.51 years. LMIR’s anchor tenants have longer leases of around 10 years. Rental yields in Indonesia remain the highest in the region at 8.6%. LMIR’s rental yield falls slightly above at 9.0%.
Source: Lippo Malls Indonesia Retail Trust
8. The moratorium on the license issuance of retails malls in Jakarta has kept new supply to a minimum in the capital. Non-executive director Ketut Budi Wijaya explained that even if the moratorium was removed, a new mall would take at least 3-4 years to build and only be ready in 2020/21. He also shared that central and east Jakarta is already well served by many malls while south Jakarta is less developed. However, the south is a water catchment area and there are limitations due to its geography.
9. A unitholder pointed out that although LMIR’s property valuation had increased in Indonesian rupiah terms, he wanted to know whether the portfolio had appreciated in Singapore dollar terms compared to its purchase price. CFO Lo Shye Ru answered that LMIR’s total purchase price for all properties in its portfolio was $2.18 billion compared to its current valuation of $1.94 billion. Essentially, LMIR has made a paper loss on its properties due to the long-term depreciation of the rupiah against the Singapore dollar.
10. Another unitholder asked if LMIR plans to hedge any decrease in fair value of properties due to currency exposure. The CFO pointed out that it makes no sense to hedge the value of its properties if LMIR has no plans to sell any of its assets. Besides, at $1.94 billon, the cost of hedging LMIR’s entire portfolio valuation would be astronomical. For example, if the cost of hedging was at 6%, that would translate to around $116 million in hedging fees alone. However, LMIR has an internal policy to hedge 80% of its operational cash flow to ensure a steady DPU in Singapore dollars for its unitholders.
11. A couple of unitholders highlighted that many of LMIR’s properties have short land leases. For example, LMIR latest acquisition, Lippo Mall Kuta, has its lease expiring in just twenty years in 2037. The chairman explained that foreign-owned companies usually own real estate in Indonesia via a Hak Guna Bangunan (Rights to Build) title. A HGB title is granted for an initial period of 30 years with a subsequent 20-year extension. Upon expiration, the title can be renewed again. The chairman explained that while the government can technically choose not to renew the lease, there have been no such cases in Indonesia thus far. Effectively, a HGB title is as good and “almost similar” to a freehold title.
12. A unitholder asked if LMIR planned to delist from the SGX and move its listing to Indonesia. Non-executive director Wijaya replied that the Indonesian government is asking LMIR to list in Indonesia and that, technically, a move is possible. But he disclosed that the board has no plan to move at the moment and LMIR has a long-term commitment to stay in Singapore’s capital market. The chairman added that the move was “never on” and was based on hearsay.
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