Heartland Boy first purchased Lippo Malls Indonesia Retail Trust (‘Lippo REIT’) in May 2016 at 33 cents. He subsequently added to his position at 37.5 cents. On 25 August 2017, he sold off all of his shares in Lippo REIT at 43 cents. Including dividends, this translated into an XIRR return of 31.3% over a 15-month holding period. Heartland Boy is quite satisfied with his return for a stock with a relatively low beta listed on the Singapore stock exchange (SGX). However, he recognizes that his investment thesis is unlikely to pan out as forecast going forward. Here are the reasons why Heartland Boy sold off Lippo REIT.
1. Expiry of Rental Support At Lippo Mall Kemang
Before Heartland Boy dived into the details on why he sold off Lippo REIT, it is best to provide the background first. When Lippo REIT acquired Lippo Mall Kemang back in December 2014, it paid approximately Rp 3,600 billion (~S$385.7 mil). The vendor, which is also the Sponsor of the REIT, provided income support for a total of 3 years in the form of a master lease agreement. (For those who are not familiar with this term, you may find an explanation in this glossary guide)
Basically, the sponsor agrees to pay and guarantee Lippo REIT that the following segments of the mall will achieve these revenues:
- Carpark – monthly revenue of Rp 7.7 bil
- Casual Leasing space – monthly revenue of Rp 6.0 bil
- Avenue of Stars (an outdoor al-fresco dining area with entertainment deck) – Rp 3.7 bil per month
The total revenue guaranteed is therefore approximately Rp 17.4 billion per month or Rp 208.8 per annum. To provide a sense of proportion, Rp 208.8 billion (~S$21.3 mil) per annum translates into a dividend of 0.0075 cents (before fees and taxes) based on the outstanding units as of 2Q2017. Given that Lippo REIT has a twelve-month trailing dividend of S$0.0352, this represents approximately 21% of its DPU! That is the primary reason why Heartland Boy has been watching the performance of Lippo Mall Kemang like a hawk. This includes visits to the mall during the weekends in Jakarta. So how has Lippo Mall Kemang performed since its acquisition in December 2014?
For the period from Jan 2015 to Sep 2015, the actual revenue of the 3 segments was Rp 18.8 billion compared to Rp 156.6 billion that was provided by the Vendor as a result of the master lease agreement. This was revealed in Lippo REIT’s response to a query from SGX.
That was a total Rp 137.8 bil of top-up required from the sponsor for the first 9 months of operations in 2015. Granted, the Manager of REIT reasoned that Lippo Mall Kemang was still young and that it would take time for it to stabilize operations. Unfortunately, its performance in subsequent years did not suggest any material improvement has been made. In the FY2015 annual report, the Board revealed that the amount of rental support for the entire year was S$ 20.6 million.
In the FY2016 annual report, the Board revealed that the amount of rental support for the entire year was S$ 22.4 million.
Not all of this can be attributed to Lippo Mall Kemang since subsequent acquisitions also contributed to the income support. Heartland Boy has another way of monitoring the income support received by Lippo Mall Kemang over the years. This is done by tracking the intangible asset on the balance sheet of Lippo REIT. It represents the unamortised aggregated rentals receivable of the Group. Unfortunately, it is a bit of trial and error and definitely not fool-proof to reveal in this blog article. But it is safe to say that a majority of the income support came from Lippo Mall Kemang, even up till end 2016.
What this suggests is that at current valuation, Lippo REIT looks extremely rich without the income support. Based on Heartland Boy’s estimates, its real distribution per unit could be in the region of 0.0285 to 0.030 singapore cents without the income support. This gives it a dividend yield of 6.6% to 7.0% based on a share price of 43 cents. Currently, Price to Book ratio is also rich at close to 1.2X. Well, the respite could come in the form of Lippo REIT having the option to extend the Lippo Mall Kemang Master Lease Agreement for up to a further 24 months. But that is just kicking the can further down the road.
Perhaps, what worries Heartland Boy more is that Lippo REIT has continued to purchase other assets with income support provided by its sponsor. For instance, Lippo REIT’s recent acquisitions of Lippo Plaza Batu, Palembang Icon, Lippo Kuta and Lippo Plaza Kendari all came with income support. This is not a good sign and investors would probably have a first taste of the negative effects of such income support when the master lease agreement of Lippo Kemang eventually terminates.
*Note that Heartland Boy has nothing against income support, it is just that investors should be mindful when the purported improvements forecast by the Manager do not materialize. Readers can find out why it is important for a Manager to be aligned to unitholders’ interest in this article – How To Invest In the Best Singapore REITS
2. Negative Rental Reversion For Anchor Tenants
Heartland Boy obviously knew the extent of the income support required when he made his first investment in Lippo REIT back in 2016. What he had been counting on was the favourable micro-economic situation to make up for the short fall. By this he meant that the lack of supply of shopping malls in Jakarta could lead to positive rental reversions of its existing malls. It did and this retail REIT even achieved positive rental reversion of 13% as recent as 2Q2017. As shown in its 2Q2017 results announcement, up to 18% of the net leasable area is still up for renewal in the second half of 2017.
As an investor of Lippo REIT then, Heartland Boy was licking at the prospect of a significant portion of its portfolio paying higher rent soon. However, what he had not expected was for negative rental reversions to be forecasted instead! According to OCBC, the leases for the anchor tenants expiring in end 2017 are likely to be renewed at lower rates. That is because the rental rates secured a decade ago were significantly higher than the prevailing market rate. This confounded Heartland Boy and definitely was not within his investment research. Clearly, even OCBC was taken aback by this admission from the new management as seen in this analyst report.
3.Expiry of Land Leases
The land leases for Java Supermall Units and Mall WTC Matahari Units are due to expire on 24 September 2017 and 8 April 2018 respectively. Collectively, they constitute 0,8% of Lippo REIT’s portfolio valuation and contributed to 1.9% of Net Property Income in FY2016. They are therefore only a minor dent and should not be a major concern when compared to the other reasons outlined above.
Why Heartland Boy Sold Off Lippo REIT
Heartland Boy has made its hay while the sun was shining. He assessed that it is now best to take a back seat and re-assess the situation next year. With the divestment of Lippo REIT from his portfolio and the impending privatization of Croesus Retail Trust, Heartland Boy will be hoarding onto cash until a suitable opportunity emerges again.
This article was published on 30 August 2017