SINGAPORE (Nov 26): On Nov 5, Lippo Karawaci revealed two likely restructurings that affect its Singapore-listed real estate investment trusts: It plans to divest Jakarta’s largest mall to Lippo Mall Indonesia Retail Trust (LMIRT), and to sell its remaining stake in First REIT. In a response to a Fitch Ratings downgrade announcement on the same day, Lippo Karawaci said: “The company regrets the decision of Fitch to lower LPKR [Lippo Karawaci]’s rating from B to CCC+ and believes that the decision was unsubstantiated.” Lippo Karawaci is the sponsor and major unitholder of LMIRT. LMIRT’s share price has fallen by half this year, from 40 cents on Jan 2 to 20 cents on Nov 22.
Jakarta Exchange-listed Lippo Karawaci added: “While we acknowledge Fitch’s concerns around liquidity expressed in May this year, LPKR has successfully delivered on its asset divestment plan with the completion of the sale of First REIT’s manager and a partial sale of its First REIT shares, generating IDR2.2 trillion [$206.8 million] in proceeds. Together with the upcoming sale of Lippo Mall Puri into our own Lippo Mall REIT, the divestment of our remaining stake in First REIT, and our stake in a hospital in Myanmar, the company will raise way in excess of IDR6 trillion in net cash. These asset divestment projects are in advanced stages of completion, and while execution risks remain, we believe the quality of assets make completion a high certainty even amidst current volatility.”
Lippo Mall Puri has a gross floor area of 165,172 sq m (1.78 million sq ft) and a net lettable area of 115,061 sq m. “LMIRT has not shared the property value of Lippo Mall Puri, though we think the acquisition could be to the tune of $300 million to $500 million, judging from the value of LMIRT’s malls in Jakarta,” an OCBC report says. LMIRT holds the right-of-first-refusal to Lippo Karawaci’s pipeline of malls, which include 17 malls in Indonesia (not already owned by LMIRT) and another 38 planned malls in the pipeline, OCBC adds.
Assuming a combination of equity, debt and possibly perpetual securities, LMIRT looks increasingly likely to have to lean on its unitholders to raise some equity. Its major unitholders are Bridgewater International and the REIT’s manager, both units of Lippo Karawaci, with a cumulative 29.99%, and Tong Jinquan with 5.74%.
The market cap of LMIRT at its current price of 19.2 cents is around $537 million. If Lippo Mall Puri is valued at $300 million to $350 million, and assuming LMIRT finances the acquisition with 50% debt and 50% equity, the REIT may need to raise $140 million to $175 million of equity. If the acquisition is funded with a rights issue, the capital raising would be in the range of 25-for-100 or 30-for-100. Depending on the accretion of Lippo Mall Puri’s net property income (NPI) to distribution per unit (DPU) and assuming it is acquired at $300 million, LMIRT could issue as much as 980 million new units at around 15.4 cents each. This would leave gearing well below 40%.
The REIT could opt for a preferential equity offering, but this would involve higher debt and a placement. At its current price of 19.2 cents a unit, it may be difficult to attract new investors.
Based on its DPU of 49 cents for 3QFY2018, LMIRT is trading at a yield of 10.2%. To make the acquisition accretive would be a challenge, but it could be done with some form of income support such as a master lease. The NPI yield for FY2017 was around 9.6%.
According to LMIRT’s 2017 annual report, master leases contributed 16%, or $31.5 million, to total revenue of $197.4 million. Excluding master leases, revenue would be 13.3% lower at $171.1 million. LMIRT stated that should Lippo Karawaci terminate its master leases, gross revenue for the nine months to Sept 30, 2018 would fall by around $26 million to $110.18 million, and distributable income to unitholders would fall by $14.75 million to $24 million. Distributions to perpetual security holders remain the same at $13.25 million for the nine months.
“Together with other related-party tenants (~16.8%), the Lippo group of companies contributed a total of ~26.8% of LMIRT’s gross revenue,” notes a recent report by Bondsupermart.
Over at First REIT, Gabriel Yap, chairman of GCP Global, says institutions which may have held units in First REIT are likely to have sold them on the downgrade of Lippo Karawaci by Fitch. “The pace and magnitude of the selldown is certainly coming from institutions. It is apparent that institutions need to sell as [sponsor] Lippo Karawaci’s rating has been downgraded,” Yap adds. Fund managers may not be able to defend continued investment in First REIT, he adds. The REIT’s units fell around 19% in three trading sessions to 93 cents on Nov 21 before rebounding.
Whatever the case, if Lippo Karawaci — which also has master lease and rental agreements with First REIT — needs liquidity, it has the option of divesting hospitals into First REIT.
It looks like tough times for minority unitholders who may have to take up LMIRT’s rights issue in the near future. First REIT may also need unitholder support should it decide to raise equity to fund more acquisitions from either Lippo Karawaci or OUE Lippo Healthcare.
