10 things I learned from the 2018 Lippo Malls Indonesia Retail Trust AGM

Lippo Malls Indonesia Retail Trust (LMIR) is a REIT that owns 30 retail malls and spaces in Indonesia. Its properties have a total net lettable area of 910,582 square metres and combined annual shopper traffic of over 160 million people. As at 31 December 2017, its property portfolio is valued at Rp19.5 trillion (approximately S$1.8 billion).

I attended LMIR’s 2017 annual meeting where the REIT posted a impressive set of results for the past year. However, LMIR’s share price recently plunged over 20% from 38 cents to 32 cents after it released an announcement that new tax regulations in Indonesia would impact its financial results moving forward.

With this in mind, I went to the 2018 Lippo Malls Indonesia Retail Trust AGM to find out more about the REIT’s past year performance and its outlook for the year ahead:

1. Gross revenue grew 5.0% year-on-year to S$197.4 million in 2017. Net property income grew 7.2% to S$184.3 million. The growth was supported by contributions from new acquisitions and positive rental reversions from existing leases.

2. Distributable income was mainly flat and grew 1.6% to S$97.0 million while distribution per unit (DPU) grew 0.9% to 3.44 cents. Based on LMIR’s share price of 32 cents as at 7 May 2018, its distribution yield is 10.8%.

3. Portfolio occupancy rate is at 93.7% — above the industry average of 84.8%. Weighted average lease to expiry is 4.13 years and the REIT recorded positive rental reversions of 5.6% for 2017.

Source: Lippo Malls Indonesia Retail Trust 2018 AGM presentation slides

4. LMIR made three acquisitions in 2017Lippo Plaza Kendari, Lippo Plaza Jogja, and Kediri Town Square. Lippo Plaza Jogja is a joint acquisition with First REIT; the property is an integrated development comprising a retail mall and a hospital component known as Siloam Hospitals Yogyakarta that will be managed by First REIT.

5. LMIR has right-of-first-refusal to acquire its sponsor’s, Lippo Karawaci, properties. The property developer owns 47 malls with another 38 in the pipeline. However, Lippo Karawaci was credit rating was recently downgraded by Moody’s and S&P after concerns about the company’s operating cash flows and liquidity. If Lippo Karawaci faces liquidity trouble, this would have a knock-on effect as a third of LMIR’s revenue is derived from the Lippo group of companies.

6. Gearing ratio as at 31 December 2017 is 33.7% and average debt to maturity is 2.13 years. Average cost of debt is 4.7% (excluding perpetual securities) and 47.5% of LMIR’s borrowings are at fixed interest rates.

7. LMIR also raised S$140 million through perpetual securities at 7% interest in 2016, and S$260 million at 6.6% interest in 2017. A shareholder questioned the management’s rationale for issuing perpertuals at 6-7% interest when LMIR’s property yield is yielding only one percentage more at 8%. CEO Chan Lie Leng explained that the management decided to issue perpetuals as they are treated as equity and allowed LMIR to avoid hitting Moody’s debt limit. Without the perpetuals, the REIT would have been unable to make any acquisitions over the least two years unless they resorted to rights issues. She revealed that LMIR offered a relatively high 7% coupon for its first tranche of perpetuals to attract investors as it was the REIT’s very first offering on the market. She added that perpetuals are usually priced around 1.5% above a company’s cost of debt. In LMIR’s case, its cost of debt is around 5% and its second perpetual coupon of 6.6% is therefore reasonable. In response, another shareholder asked if LMIR really needed to keep on acquiring and that adding more debt would not improve its credit rating.

8. An unhappy shareholder was critical of LMIR’s tax announcement and linked it to the drop in the REIT’s share price. He wanted to know the full impact of the new tax regulations and asked if the management was able to circumvent it. The CEO explained that, effective 2 January 2018, LMIR now has to pay a 10% top-line tax on service and utilities recovery charges collected from tenants. Previously, LMIR had the option to pay a cheaper 25% tax on the bottom-line for the charges collected. She conceded that the new ruling will have a direct hit on DPU and the management is consider passing some of the costs to the tenant by raising the service and utilities recovery charges. But this will depend on whether other landlords in Indonesia also plan to raise charges. If not, raising them could make LMIR less competitive.

9. Since LMIR earns its revenue in Indonesian rupiah but pays its distributions in Singapore dollars, the REIT currently hedges 80% of its cash flow to minimise forex volatility. However, the CEO admitted that the Singapore dollar is ‘very strong’ and there is inherent risk as investing in LMIR is ultimately a rupiah play.

10. A shareholder asked if the management would consider borrowing in rupiah to act as a natural hedge. The CEO explained that it rupiah loans have an interest rate of 11-12% compared to 5% for a Singapore-dollar loan, and it still makes more financial sense to borrow in dollars. At this, Chairman Ketut Budi Wija remarked: ‘That’s why we’re here! Indonesia needs Singapore… Indonesia is a big country, but we need a strong, small country. That explains everything!’

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Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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