Wednesday, December 13, 2017

Worth holding Lippo Mall Trust??


Just to follow up on my previous post on Lippo Mall Trust since 8 April 2017.

Brief summary
It is the only Indonesia retail REIT listed on SGX. It has 21 retail malls and 7 retail spaces in different part of Indonesia. It pays out dividends quarterly.

The sponsor of LMIR trust, PT Lippo Karawci Tbk is also the Indonesia's largest listed company which include urban development, large scale integrated real estate, hospitals, retail malls, hotels and asset management. From the sponsor plans, it is aiming to develop 40 new retail mall in Indonesia and to increase the number of malls under management to over 80 retail malls by end of 2030.1

 Latest update to Lippo Mall trust
-Completion of acquisition of Lippo Plaza Kendari which has well-known retailers such Matahari Department, Hypermart, Pizza Hut, Solaria, Cinemaxx and Time Zone. (announced on 21 June 2017)
-Extension of HGB title for the underlying land on which the four strata title ownership certificates of the Java Supermall Units are registered for a period of 20 years to 24 September 2037 and the validity of the four strata title ownership certificates have accordingly been extended for the same period. (announced on 11 Aug 2017)
-Asset Enhancement Works At Ekalokasari Plaza (announced on 9 Oct 2017)

 -Joint Venture with First REIT for integrated development which comprised of a hospital "Siloam Hospital Yogyakarta" and a retail mall "Lippo Plaza Jogja". Lippo Plaza Jogja is located at Yogyakarta which offers a diverse range of tenants including Matahari Department store, Hypermart, Cinemaxx, Celebrity Fitness and Time Zone. (announced on 13 October 2017)

-New lease agreement with the underlying tenant of retail spaces at for malls in existing portfolio for another 3 years. (announced on 17 October 2017)

-Change of trustee from HSBC Institutional Trust Services to Perpetual (Asia) Limited. (announced on 1 November 2017)

-Release of Third quarter of the result. (announced on 2 Nov 2017)
  • The DPU is flat.
  • Gearing ratio 28.7% (This is not the updated figure)1
  • Overall Occupancy is 94.3% which is higher than industry average of 85.0%1
  • High Weighted Average Lease Expiry at 4.18 years1
-Extension of Lippo Mall Kemang master lease (announced on 12 Dec 2017)
It is one of the key concern which is highlighted by most people that is it not performing up to the mark. Most of the tenants are still enjoying concessionary rental rates which are below market rates to attract them. 

However, there is increase traffic flow and 509sq m of rental revision is around 22% in 2017. 1488sq m of rental will expire in 2018 and would be renewed or re-let at prevailing market rates. They are also adding popular brand like Uniqlo and organizing more activities to attract the crowd. With the extension of master lease for another 2 years, it will definitely help.4
 
-EGM on  the approval proposed joint acquisition with First REIT and KTS acquisition (would be held on 20 December 2017) 


Using Swot analysis. 

Strength
-Good management
The management has locked 70% of borrowings into fixed interest rate to mitigate against raising interest rate.1
-Good occupancy rate
The occupancy rate of 94.3% is higher than industrial average of 85.4% 3
-Diversify
Their assets are located not just in Jakarta but diversified over different part of Indonesia. This will help to mitigate their risks.
-Strong sponsor
Having the support of its Sponsor which can continue to provide a pipeline of retail assets.

Weakness
-Low rental revision
As seen in the latest quarter, the rental reversion is only 2.9% which is the lowest as compared to the past few years. The lease expiry is 12%, 10%, 9% and 34% for 2018, 2019, 2020 and 2021 & beyond respectively. This is something which we have to take note.
-Slow down in consumer spending
 There is slow down in consumer spending for past few quarters which could affect the REIT rental rates.

Opportunities 
-Indonesia is 4th most populous Nation in the world after China, India and US
Huge population with a rapid growing of middle-class is the key for sustainable growth. The projected growth for Indonesia in 2017 is around 5.2%. Coupled with the fastest urbanization growth in Asia, World Bank estimates more than 68% of Indonesia's population will live in cities over the coming 10 years.
-Low gearing ratio which is below 45% allows more acquisition.1
Through acquisition, the yield can further go up.

Threats
-Change in local regulation
Any change in local regulation might affect the management of the REIT especially with the land lease.
-Risking interest rate
FED is raising interest rate and any faster pace of raising interest rate, it could affect but 70% of the interest rate has fixed.
-Forex exchange rate
As their earning come from Indonesia and any drastic change in exchange rate, it will also affect the profit in Sing Dollar
-Compeitition from E-commerce
Singapore malls have been facing competition E-commerce and it has affected their earning.
Lippo must continue to manage their asset well in order to face competition from other companies.
-Instability in South China Sea
There is uncertainty in South China Sea which can lead to instability. 

Recently, I have also attended one of the talk by Lippo Mall Trust team. Some of the interesting points:
-Expected rental revision of 5-8%
-Insurance cover replacement value of the asset
-Using of moody ratio as especially for bond financing
-Still has room for small acquisition
-Possibility of right issue if only there is sizeable asset

I believe Lippo mall trust still has room for improvement and will do well in the future. Currently, I am holding 26k Lippo Mall trust share including my dad portfolio. It is not a call to buy or sell, please do your own due diligent. If you have any idea to share, feel free to voice out.

I am also exploring using leverage which would allow higher return of yield. Would update if it is workable solution.

Information is gather from latest financial report.
2 Information from Cushman & Wakefield Q4 2016
3 Information from the World Bank 
4 Information from Lippo announcement