Lippo Malls Indonesia Retail Trust (LMIR Trust) – Financial Analysis and Investment Recommendation for 3Q2024
Report Date and Period: The report covers the financial period ending on 30 September 2024.
1. Business Description
Core Operations and Segments:
LMIR Trust is a Singapore-based REIT that owns and operates a diversified portfolio of 22 retail malls and 7 retail spaces across Indonesia. Its primary focus is on retail and retail-related real estate, with tenants including well-known brands like Hypermart, Matahari Department Store, Uniqlo, Zara, Starbucks, and Ace Hardware.
Geographic Footprint:
The properties are strategically located in major Indonesian cities, appealing to the large middle-income population, ensuring tenant demand and stable occupancy rates.
2. Industry Position, Competitors, and Market Share
Industry Standing:
LMIR Trust holds a solid position in Indonesia’s retail real estate sector, focusing on malls and retail spaces catering to middle-income demographics. The competitive landscape includes other mall operators, both local and international, but LMIR Trust’s strong tenant roster and significant market penetration provide it with a competitive edge.
Competitive Advantage:
Its diversified tenant mix reduces dependency on any single revenue source, with no tenant contributing more than 10% of the gross revenue. This mitigates risk and enhances revenue stability. Additionally, LMIR Trust has introduced photovoltaic solar installations in selected malls, emphasizing sustainability.
3. Financial Overview
Income Statement Highlights
- Revenue Trends:
- Rental revenue decreased slightly by 4.7% YoY in SGD terms but saw a 1.4% growth in IDR terms, reaching IDR 320.5 billion for 3Q2024.
- Gross revenue in SGD terms also saw a 3.6% decline YoY, impacted by a 5% depreciation of the IDR against the SGD.
- Net Property Income (NPI):
- Declined 6.5% YoY in SGD terms, attributed to higher operating costs in a high-inflation environment.
Balance Sheet Highlights
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Total Assets:
- Investment properties increased to SGD 1.57 billion, largely due to property value adjustments, including the extension of operational rights at Cibubur Junction mall.
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Gearing:
- Gearing is at 44.97%, close to regulatory limits, which may limit further debt-financed expansion.
Cash Flow Statement Highlights
- Cash and Equivalents:
- Cash balances have decreased substantially, with non-restricted cash at SGD 16.3 million compared to SGD 39.7 million at year-end 2023, indicating liquidity constraints due to ongoing capital commitments and debt obligations.
4. Key Financial Metrics and Dividends
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Dividend Distribution:
- LMIR Trust has ceased distributions to unit holders and perpetual securities holders due to cash conservation measures and financial obligations.
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Occupancy Rate:
- Increased slightly to 80.1% in 3Q2024 from 79.9% in the previous quarter, reflecting the Trust’s asset management initiatives.
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Net Profit and Earnings:
- The Trust recorded a significant net loss of SGD 37.2 million for 3Q2024, highlighting risks associated with foreign exchange volatility and increased finance costs.
5. Special Activities for Profitability Improvement
LMIR Trust has undertaken several initiatives to improve profitability:
- Transition to IDR-denominated debt to create a natural hedge against currency risks.
- Enhanced tenant management and rental reversions, resulting in an increase in occupancy and an average rental reversion of 7.9%.
- Installed solar panels at selected properties, emphasizing environmental sustainability and reducing long-term operational costs.
6. Key Strengths and Risks
Strengths:
- High-Quality Portfolio: Strategically located malls and high occupancy rates provide steady rental income.
- Resilient Tenant Mix: Diversified tenant base with established brands reduces dependency risks.
- Sustainability Initiatives: Solar installations and occupancy improvements reflect commitment to long-term value.
Risks:
- High Gearing and Liquidity Constraints: The Trust’s high debt levels and limited cash reserve pose a risk for future debt servicing and expansion.
- Foreign Exchange Exposure: Revenue declines in SGD terms due to IDR depreciation against the SGD.
- Distribution Suspension: Ceasing distributions may deter income-focused investors.
7. Investment Recommendation
For Current Investors:
Consider holding if focused on long-term growth. However, caution is advised due to liquidity and leverage constraints that could impact cash flow stability. The strategic IDR debt alignment and solar initiatives reflect management’s adaptability, but the ongoing dividend suspension may affect yield expectations.
For New Investors:
Given the current high leverage and suspended distributions, it may be prudent to delay new investments until the Trust demonstrates stabilized cash flows and reduced debt levels.
Disclaimer: This recommendation is based on the provided financial information and may not fully account for broader market dynamics or unforeseen economic changes.
