Lippo Malls Indonesia Retail Trust, Initiation Report

Business Model of Lippo Malls Indonesia Retail Trust (‘Lippo Mall Trust’)

Lippo Malls Indonesia Retail Trust is a REIT listed on the SGX which manages a portfolio of 19 malls and 7 retail plaza across Indonesia.  Lippo REIT collects rent from the tenants and after netting operating expenses, the rents are then paid out to unitholders. Therefore, it enables the unitholders to become landlords and should be considered a high-dividend stock in one’s portfolio. The bulk of its portfolio is in Jakarta and hence this initiation report will have a focus on the Jakarta retail market. It can be considered defensive in nature and hence it is largely tethered to the Indonesian household consumption.

Diagram 1: Location of Lippo Malls Trust’s Portfolio (Source: Lippo Malls Indonesia Retail Trust)

Investment Merits of Lippo Malls Indonesia Retail Trust

1. High Dividend Yield

When it comes to REITs and business trusts, the first question on most investors’ minds is “What is the dividend yield?” Readers will be pleased to learn that Lippo Malls Trust currently provides a 8.7% dividend yield based on trailing 12 months. This is one of the highest yielding dividend stocks on SGX right now and is therefore, an attractive candidate to dividend hungry investors such as Heartland Boy.

2.Improving Track Record

The performance of a REIT or business trust is often judged by a single metric- Distribution Per Unit. (‘DPU’) Lippo Malls Trust experienced a dip in DPU in 2014 but has since rebounded strongly in 2015 and 2016 through positive rental reversions and shrewd acquisitions.

Diagram 2: Lippo Malls Trust’s DPU has improved for 6 straight quarters

Nonetheless, Heartland Boy is also certain that many readers will be asking if this improvement can be sustained? As shown below, it is possible to look at some indicators to give us a glimpse into the future performances of Lippo Malls Trust.

Indicator 1: Astute Asset Management

As at 30 June 2016, Lippo Malls Trust has a Weighted Average Lease Expiry (WALE) of 4.7 years. This implies that it takes an average of 4.7 years for the tenants’ leases to expire in its portfolio of malls. This is a very strong sign of stability to unitholders that, ceteris peribus, future DPU can be sustained.

Beside a long WALE, Lippo Malls Trust’s management has also demonstrated the capability to achieve this with positive rental reversions as well. Critically, they were achieved at a rate higher than inflation. For instance, Lippo Malls Trust last achieved rental reversion of up to 6.3% in 2Q2016 when the inflation rate of Indonesia was about 4-5%.

Diagram 3: Lippo Mall Trust’s historical rental reversion (Source: Lippo Mall Indonesia Retail Trust)

Moreover, when Heartland Boy visited Plaza Semanggi recently, he was pleased to see that it had managed to revamp the basement level to include Fresh Food, a new supermarket, as a key tenant. Management has revealed that future AEI would focus on lifestyle themes that will introduce more F&B outlets which generally pay higher rents and are more resilient to the threat of e-commerce.

Indicator 2: Proactive Capital Management

As a REIT that collects rental revenue in Indonesian Rupiah but pays unitholders in Singapore dollars, the volatility of the Indonesian Rupiah is the singular concern on top on everyone’s minds. Unitholders will be pleased to learn that as at Feb 2015, approximately 60% of cashflow up till February 2017 had been hedged at a range of 9300-9500. Management revealed that it targets to hedge up till 90% of cashflow in the future. Perhaps, this may have already been achieved. Meanwhile, up to 86% of its debt is on a fixed rate basis. Certainly, its capital markets team has done a decent job thus far, although, more can definitely be done.

Indicator 3: Retail Rent and Occupancy in Jakarta Continue To Be Bullish

Rent and occupancy are a function of demand and supply. Unitholders will be pleased to learn that there is strong demand for retail spaces but limited supply in the Jakarta retail market. Demand remains strong as retailers are keen to get a foothold into South East Asia’s largest consuming class. However, to curb the notorious traffic in Jakarta, the governor had put in place a moratorium on developing new retail malls since 2011. Therefore, there is almost negligible new supply coming into the Jakarta market. As a result, retails rents have continued on an upward trajectory while occupany remains at strong levels of 90%. In other words, the retail segment is in a sweet spot for landlords.

Diagrams 4 and 5: Jakarta Retail Mall Rent and Occupany (Source: Jones Lang LaSalle)

Indicator 4: Favourable Marco Outlook

Indonesia just reported 2Q2016 GDP growth of 5.18%; a performance that was not only streets ahead of estimates but also the strongest growth in 10 quarters. More importantly, household consumption, of which Lippo Malls Trust is tethered to, grew year on year as well. The surprise GDP growth came hot on the heels of recent positive reforms that were also given the thumbs up by the business and investor community. For instance, President Jokowi had recently reshuffled his cabinet as well as got his Tax Amnesty Programme approved by parliament. The Tax Amnesty Programme is expected to bring in billions of “lost” revenue back to the government coffers, and this will in turn have a multiplier effect on government expenditure and household consumption. All these bode well for the Indonesia economy, and most certainly Lippo Malls Trust. Therefore, unitholders can also view Lippo Malls Trust as a proxy to the Indonesian consumption growth story.

Investment Risks of Lippo Malls Indonesia Retail Trust

1.Income Support from Kemang Malls

[Update] In an SGX release on 12 Feb 2016, Lippo Malls Trust revealed that its 9M15 DPU would have been 1.84 cents instead of 2.29 cents had it not utilised the income support for Kemang Mall from the vendor. The top up from the income support was approximately Rp 183 billion or approximately S$19 million in today’s context. This income support would expire in 14 September 2017, and ceterius paribus, the trailing 12 month DPU would fall from 0.0326 cents to 0.0258 cents. This translates into a yield of only 7.0% based on its closing price of $0.37. This is indeed worrying if the situation does not improve as Lippo Malls Trust had anticipated when it first acquired Kemang Mall.

2.Short Land Leases

Lippo Malls Trust has land leases that average 17 years. This is acutely short compared to land leases in Singapore as most retail malls are on 99 year leases. Moreover, some assets are on the Build-Operate-Transfer (‘BOT’) scheme, which essentially means that these assets will be transferred back to the vendor at the end of the scheme. As such, there will always be a valuation gap between Lippo Malls Trust and its S-REITS peers in the SGX. Therefore, unitholders pinning their hopes on capital growth would have to wait patiently as this probably has to be underpinned by continued DPU growth.

Conclusion of Lippo Malls Indonesia Retail Trust

Lippo Malls Trust has a lot of positives going on at the moment. Not only is the fundamental analysis favourable, the technical analysis is also strong as both the 50-day and 150-day moving average are trending upwards. Externally, the retail market outlook is very strong while the Indonesia economy has finally shown signs of bottoming out. These are strong tailwinds that should propel more growth in DPU over the next few quarters.

For dividend cash cows such as Lippo Malls Trust, Heartland Boy has no personal target price. Rather, his investment decision is driven primarily on whether there are counters out there on the market that offer better risk-adjusted returns. With a trailing 12 month dividend yield of 8.7%, Lippo MallsTrust is going to be hard to beat. And, of course, it is a good counter to provide some form of diversification from Croesus Retail Trust. However, do note that Lippo Malls Trust had acquired Kemang mall with income support from the vendor, so it will be good to keep a close eye on this going forward.

Vested at 35 cents (nett of dividends collected) since May 2016

This article was published on 7 August 2016.