LMIR Trust gets loan conditions extended

Loan facility also reduced to $125m and tenure cut from five to four years

THE manager of Lippo-Mapletree Indonesia Retail Trust (LMIR Trust), which last year obtained a $350 million term loan facility to finance the trust’s purchase of Sun Plaza in Indonesia’s Medan, has secured a deadline extension to meet the lender’s security assignment requirement.

Under the original facility agreement in March last year, the trust manager, Lippo-Mapletree Indonesia Retail Trust Management, was required to procure the consent of certain Indonesian counterparties for a number of build, operate and transfer (BOT) agreements to assign the rights of the manager to the lender, Deutsche Bank, Singapore Branch, as security for the loan.

But there has been a delay in getting consent from these counterparties for some of the malls. The trust manager has been negotiating with the lender to extend the deadline of obtaining the relevant consents to Dec 31, 2009.

This was disclosed in LMIR Trust’s 2008 annual report.

Last Friday, the manager entered into an amendment and restatement agreement with the lender. The lender has agreed to, among other things, extend the deadline to Dec 31, 2009, for an extension fee of $1.5 million to be paid by LMIR Trust.

The loan tenure of the facility has been reduced from five years to four years, with effect from March 31, 2008, the trust manager said yesterday.

It added that ‘following the cancellation of an unutilised portion of the term loan, the loan facility has been reduced to $125 million’.

The other key terms of the loan remain the same. The all-in cost of funds will be about 7.2 per cent per annum for the remainder of the three-year loan tenure.

A separate announcement said that the chief financial officer of the trust manager, Rudi Chuan Hwee Hiow, has stepped down with effect from yesterday ‘to pursue personal interests’.

He is replaced by Shane Hagan, 42, who has many years of experience in financial management of publicly-listed property entities. From 2003 to 2007, for example, Mr Hagan was CFO of the management company of Ascendas Reit.

Alan Wong Peng How has also been appointed as investment manager. He has earlier held positions with MacarthurCook Industrial Reit, Mapletree Investments Pte Ltd and Ascendas Pte Limited.

Former investment manager Leigh Regan will be employed by PT Lippo Karawaci Tbk as business development director and will be based in Jakarta. Mr Regan will continue to support the operating performance of LMIR Trust’s portfolio in Indonesia.

DPU sees sharp recovery QoQ

DPU recovers. LMIR Trust posted S$18.7m in 1Q gross revenue, down 8.1% YoY and 13% QoQ. Net property income fell 9.3% YoY to S$17.5m, but registered a 41.7% QoQ improvement as 4Q NPI was hit by a S$7m provision for receivables. 4Q results were also hit by a S$3.3m write-off of fees on an unused loan facility. Consequently, distributed income rose 351% QoQ to S$14.6m, while falling 13% YoY. LMIR will pay out 1.36 S cents for the quarter versus the 0.3 S cents paid out a quarter ago. This is equivalent to an annualized yield of 22.2% on the current share price. Results were better than expected.

Casual leasing still a problem. To recap, 4Q was plagued by a few key issues: expiry and early termination of leases as well as declining other income. Last quarter’s provision was on outstanding rents from wholesaler tenants or third-party agents who earn revenue from sub-leases on atrium spaces/corridor leases. These wholesalers were in arrears and had also terminated their leases. These issues flowed through to 1Q revenue as well. The manager said it is moving away from wholesale tenants to dealing directly with casual tenants. We note LMIR still has another S$19.3m in receivables, or 19% of total FY08 revenue.

Rental market is tougher. Indonesia’s central bank is projecting economic growth of 3-4% in 2009, compared to growth of 6.2% a year ago. The manager said that LMIR was achieving lower rental increases on lease renewals than it had forecasted at IPO. The manager guided that the rental outlook for 2009 is challenging, as “retail space demand is expected to weaken and competition among landlords to intensify”. We note that portfolio occupancy has fallen two quarters in a row now, to 95% from 95.7% in December. This is still higher than the 83.1% industry average (Cushman & Wakefield). Mal Lippo Cikarang saw the biggest decline, with occupancy falling 700bps to 86.6% in a space of three months.

Issue with lender. The manager warned that there is some delay in arranging the correct documentation for its S$125m loan. It is currently asking its lender for an extension – which may result in a one year reduction in loan tenure and a restructuring fee of S$1.5m. LMIR is geared at 12.3%. We have adjusted our earnings estimates but will keep a close watch on earnings stability over the next few quarters, as well as outstanding receivables. We maintain our HOLD rating and S$0.24 fair value as we track these issues.

Triple whammy decimates 4Q DPU

Sickly 4Q. Lippo-Mapletree Indonesia Retail Trust (LMIR)’s 4Q results missed both our expectations and LMIR’s forecasts at IPO (despite contributions from a post-IPO buy). Gross revenue fell 19% QoQ to S$21.4m. We understand this was driven by expiry and early termination of leases as well as declining other income. LMIR also made a S$7m provision on
receivables, with net property income subsequently falling 51% QoQ to S$12.4m.

NAV falls 26% QoQ. LMIR also recorded a 26% QoQ fall in NAV to S$0.71. We estimate that property values slipped 9% in Indonesian Rupiah terms with the independent valuer adopting a 200 basis point cap rate expansion to reflect higher interest rates. This, coupled with adverse IDR-SGD forex movements, led to LMIR booking a S$344.5m fair value (non-cash) loss on property values. While distributable income is hedged, asset values are not, and investors bear the risk of SGD-denominated ownership of IDRdenominated assets.

Everything but the kitchen sink. Meanwhile, LMIR also decided to write off S$3.3m in fees on an unused loan facility as the manager believes acquisitions are unlikely in 2009. This is being treated as a cash charge, impacting distributions. Together, this write-off; the revenue decline; and the provision ate a substantial chunk out of 4Q distributable income, which fell 81% QoQ to S$3.2m. This translates to a 4Q DPU of 0.3 S cents, or an annualized yield of just 5% (versus 27% based on 3Q DPU).

Provision size could signal revenue model risk. LMIR attributed the S$7m provision to outstanding rents from wholesaler tenants or third-party agents who earn revenue from sub-leases on atrium spaces/corridor leases. These wholesalers are not only in arrears but have also terminated their leases. Now, we understand casual leasing contributes about 10% of total revenue. But on that basis, the exceedingly large provision is equivalent to an entire year’s worth of arrears. We also understand that LMIR does not collect security deposits from these wholesaler tenants. Early termination of leases – especially of this breed – is then a key risk, creating earnings uncertainty. We note LMIR has another S$19m in receivables, or 19% of total FY08 revenue.

Downgrade to HOLD. LMIR needs to resolve the uncertainty through better (direct) rental contracts as well as security deposits. We have lowered our earnings estimates, and will keep a close watch on earnings stability over the next few quarters. For now, LMIR’s 20% FY09F yield seems relatively expensive on a risk-reward basis. Downgrade to HOLD with S$0.24 fair value (prev: S$0.38).

LMIR Trust Q4 DPU 79% below forecast

For 2009 it plans to focus on organic growth instead of adding assets

LIPPO-MAPLETREE Indonesia Retail Trust (LMIR Trust) has announced a distributable income of $3.2 million for the fourth quarter ended Dec 31, 2008, 79 per cent below its forecast of $15.5 million.

Distribution per unit (DPU) for the period is 0.3 cent, also 79 per cent below its forecast of 1.45 cents.

For the financial year ended Dec 31, 2008, distributable income was $59.5 million, 14 per cent lower than its forecast of $68.9 million while DPU was 5.6 cents against its forecast of 6.48 cents.

LMIR Trust, which was listed in November 2007, said the decrease in distributable income for FY2008 was due to the allowance for outstanding receivables of $7 million and the writing off of an upfront arrangement fee of $2.8 million for a $225 million term loan facility that was expected to be syndicated by September this year.

‘The manager will focus on organic growth for 2009 and asset acquisitions are unlikely,’ said LMIR Trust. ‘Coupled with the challenging credit environment, the manager has, as a measure of prudence, decided to write off the $2.8 million fee.’ Legal fee of $0.5 million would also be written off, it said.

The $7 million receivables are outstanding rent from wholesaler tenants. LMIR Trust said that while these tenants have given notice of termination of their leases, it considers these tenants to be in breach of their contractual obligations and will engage all legal means to recover the debts. ‘However, as a measure of prudence, the manager has decided to make specific provisions for the total amount outstanding,’ it said.

Gross revenue for the quarter was $21.4 million, one per cent above forecast. Excluding Sun Plaza, which was acquired in March 2008, gross revenue was $17.6 million, or $3.5 million below forecast.

Property operating expenses for the quarter totalled $9.1 million, which is $7.8 million above its forecast. LMIR Trust said the increase was due mainly to the outstanding receivables of $7 million, higher land rental, additional property management fee arising from the addition of the Sun Plaza property and higher operating expenses.

The lower gross revenue and higher property operating expenses resulted in a net property income of $12.4 million for the quarter, which is $7.4 million or 38 per cent below forecast.

Total loss for the quarter after tax but before distribution was $255.9 million, against a forecast net profit of $14.6 million. This was attributed to a deficit of $301.7 million (net of deferred tax) arising from a change in fair value of investment properties. A significant portion of this was due to the depreciation of the Indonesian rupiah against the Singapore dollar, said LMIR Trust. While LMIR Trust does not have a policy of hedging capital values, rupiah income is substantially hedged in Singapore dollar and this has resulted in unrealised exchange gain of $46.2 million, added LMIR Trust.

LMIR Trust said that as at end-2008, its portfolio was valued at $829.9 million.

Gearing at end-2008 stood at 12.4 per cent, with total borrowing of $125 million. LMIR Trust said no debt is to be refinanced until March 2013.

At the end of trading yesterday, LMIR Trust’s unit price was 24 cents, down 4 cents.

Retail story still compelling

Low gearing, sponsor support. We believe perceived risk will drive REIT performance in 2009. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. LMIR is currently trading at a 68% discount to book, but those asset values do not reflect current exchange rates.

Retail focus still compelling. We think the retail story in Indonesia is still compelling. The country’s domestic economy offers some insulation from the global crisis. A Reuters poll indicates that while Indonesia will see some slowdown, it will be Southeast Asia’s best performer. The poll forecasted growth of 4.8% next year and 5.6% in 2010, thanks to still healthy consumption1 . LMIR’s portfolio of eight retail malls and seven retail strata spaces is strategically located within well-established population catchments across Indonesia. The portfolio boasts strong tenancy profiles with large anchor tenants such as hypermarkets.

Asset revaluation risk. We note that LMIR’s debt is SGD-denominated. The IDR has seen a large movement against the SGD over the past year. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense. However, forex volatility does create a major revaluation risk. LMIR’s assets are due to be revalued in 4Q08. The REIT’s portfolio will be revalued in IDR – this IDR value will then be converted back into SGD at spot rates. Risk appetite for the IDR has recovered from the lows of October. But with the level of volatility seen in the currency this year, the exchange rate on 31st December (which determines asset values) is anybody’s guess. This puts LMIR’s book value at risk – even if the IDR value of the portfolio stays the same. While revaluation gains or losses are non-cash in nature, it would affect LMIR’s gearing level and NAV.

Maintain BUY. In our last report, we had taken a more cautious view on our assumptions on rental growth, discount rate, and cap rates. We have also taken a fresh look at our valuation model, relaxing our fairly bleak expectations for the IDR-SGD. Our RNAV estimate for the REIT is S$0.55. Our fair value estimate of S$0.39 (prev. S$0.27) prices in a 30% discount to that estimate. Maintain BUY.