Let’s kick off with some good news.
Lippo Malls Indonesia Trust (LMIRT) had some outstanding growth – gross revenues up 68%, net property income (NPI) up 91%.
In its latest 9M2022 results – gross revenues soared 23%, NPI grew 30%.
These huge growth numbers were driven by lower discounts and rebates given to tenants during the COVID pandemic. Pretty impressive.
I mean, over the last three years that LMIRT retail malls were shut, it didn’t collect rent, its malls even had to give rental reliefs.
And now that shopping malls in Indonesia are opening up, and social restrictions lifted, foot traffic is returning to the good old pre-COVID days.
In fact, foot traffic has steadily climbed back up to 65% of pre-COVID traffic.
And recently, LMIRT has renewed 73% of its expiring leases just over the last nine months.
Is the worst over? Well, let’s find out.
Singapore’s first “pure-play” Indonesia retail REIT
At a market cap of S$261 million, LMIRT is a full-on, Singapore REIT that owns only Indonesia retail malls – a total 29 retail malls across the archipelagic state’s most popular cities, including Greater Jakarta, Yogyakarta, Medan and Bali.
LMIRT has 3,000 tenants, with Carrefour, Sogo, Victoria Secrets and Zara as its key occupiers.
LMIRT is famous for its mega “you can shop until you drop” shopping malls.
LMIRT’s most recent acquisition — Lippo Mall Puri, is a massive 120,895 sqm retail mall with over 300 tenants.
Walk around LMIRT’s giant malls, and you’ll realize you need more than a day to visit every shop.
What’s more, with the country’s relatively big family size, growing middle income group, Indonesia retail malls are riding on the growing ASEAN economy.
But LMIRT faces an avalanche of growing debt problems
LMIRT’s 36% gearing ratio, 100% “fixed-rate” payment and a high occupancy rate is what analysts say a “healthy financial position.”
That was 2019.
The thing is, LMIRT recently ran into some debt problems.
You see, all that healthy financial position went into the bin when the Fed started to raise interest rates.
My take? I think LMIRT was caught unprepared, which I’ll explain in a bit.
When the Fed raised rates late last year, it forced capital to rush out of emerging markets to safe haven currencies — mainly the US and Singapore dollar.
This currency crisis set off an avalanche of bad events for LMIRT.
First, the falling Indonesia Rupiah sunk LMIRT’s properties value, and pushed LMIRT’s gearing ratio to 43.7%.
Management now expects gearing to hit 44.6% — though this is still well within MAS gearing limits of 50%.
Note: gearing ratio is total debt divide by total assets.
If you ask me, with global interest rates staying high, the Rupiah is just going to get worse from here.
LMIRT was caught unprepared
But the other, more serious problem, like I’ve said earlier, is this. LMIRT was caught unprepared.
LMIRT all along has pretty good debt profile. Yet, the thing is, LMIRT’s stopped hedging interest rates since 2021 — with only 42.5% of its current interest rates fixed.
Why didn’t management maintain its full interest rate protection?
I’m not sure.
But what I’m sure is, as rates continue to stay high, the interest LMIRT ultimately pays on its debt will go up too. Same goes for other weaker Singapore REITs.
And since most of LMIRT’s debt are paid in Singapore and US dollar, a weak Rupiah will force LMIRT to pay an even higher interest costs.
Put it this way, LMIRT has about S$880 million of loans.
And it’s already paying an enormous 6.7% interest rate (see below). That’s more than twice the average borrowing costs of Singapore REITs. Today, LMIRT’s NPI can only cover twice the amount of interest it pays.
To put things in perspective: Ascendas REIT’s interest coverage is 6.0x, CapitaLand Integrated Commercial Trust is at 3.9x.
Even when CapitaLand Ascott Trust suffered losses when COVID struck, the hospitality trust’s interest coverage ratio isn’t anywhere as low as LMIRT’s.
The good news is, LMIRT doesn’t have to refinance until 2024.
And according to management, they have plans to sell down some of LMIRT’s assets, which will help reduce the REIT’s gearing.
What I like here is, LMIRT continued to pay dividends. In fact, over the last 12 months, it paid a 0.36 cents distribution.
That’s a current 11% dividend yield.
What’s more, it seems LMIRT “dirt cheap” shares have priced in all the bad news. LMIRT shares have also recovered over 54% since last October 2022.
The question for investors is…
Is the worst over for LMIRT?
Well, I don’t want to get too carried away yet.
You see, there’s some thing that bothers me as I poured through LMIRT’s financial reports.
LMIRT’s occupancy rate is higher than the industry. But a closer look — LMIRT’s assets’ occupancy rates are actually falling. Even before the pandemic, the REIT’s occupancy has fallen from 93% to 80%.
While foot traffic in Indonesia retail is recovering, it seems LMIRT’s tenants are facing serious threat of e-commerce.
Consumers are getting more digitally connected. And modern online retail channels are getting more popular.
It probably makes more sense (and convenience) to buy things online in Indonesia – where delivery costs is cheap, and the country is huge.
This is unlike Singapore retail malls where it’s still easily accessible.
What people aren’t paying attention to
Here’s the other thing not many people are paying attention.
Even if LMIRT debt problems go away, occupancy rates improved, I’m still bugged by the fact that 37.5% of LMIRT’s tenants are related-parties. That means, more than a third of its tenants come from its sponsor – The Lippo Group.
Some years back, Lippo went into trouble.
Then dragged down First REIT, which caused many investors to suffer losses as the Indonesia healthcare Singapore REIT had to restructure its assets.
Even though LMIRT’s sponsor, Lippo has financially improved from its liquidity crisis last time, I’m not sure when another financial problem will come up for its sponsor.
In its latest financial results, Lippo still holds substantial debt and little cash in its balance sheet.
And this could be a long-term issue for LMIRT’s rental collection.
Final Thoughts — would I buy LMIRT at 11% yield?
LMIRT’s shopping malls are recovering fast.
So far, LMIRT’s distribution per unit (DPU) also grew 3.8% to 0.09 cents per unit.
And over the last 12 months, it paid 0.36 cents distribution, or dividends.
At current 3.3 cents per unit, that’s a dividend yield of 11%.
But this retail landlord is facing some debt problems, especially the risk of repaying its debt. Also, the interest LMIRT pays is probably going to go up.
I don’t think the Fed will pull off its brakes on interest rates soon.
On a more serious note, credit rating agencies are aggressively cutting LMIRT’s credit ratings — Moody’s cut LMIRT’s ratings from B3 to Caa1. And Fitch slashed LMIRT’s ratings from B to B-.
According to Moody’s analyst, “The downgrade reflects our view that debt restructuring is likely to take place over the next 6 -12 months as the trust has no concrete refinancing plans for its bank loan maturities due November 2023 and January 2024, as well as its US dollar bond that will mature in June 2024 amid a tight funding environment…”
In other words, LMIRT faces huge refinancing risks.
What’s more, when rating agencies cut a REIT’s ratings, the REIT’s interest costs go up because of a lousier credit score. The REIT ends up paying more interest. And this pushes the REIT off the debt cliff at a faster rate.
At some point, management has to sell down its assets, in order to lower its gearing ratio. However, asset restructuring also takes time.
I mean it could take a few years. Especially trying to sell retail malls that have falling occupancy rates.
Of course, not all Singapore REITs with high dividend yield are created equal.
If you ask me, on a longer term outlook, I wouldn’t go crazy over LMIRT’s current high dividend yield.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan