SINGAPORE (Apr 15): Although stresses at Lippo Karawaci have been alleviated, they remain in other parts of the group, which could put pressure on its Singapore-listed real estate investment trusts (REITs).
On March 12, Lippo Karawaci announced a US$1,010 million ($1,367 million) funding programme consisting of a US$730 million rights issue underwritten by the Riady family, and US$280 million from asset divestment. The rights issue brings in new investors, such as George Raymond Zage III and Chow Tai Fook Jewellery Group, who together are investing US$70 million. More recently, a Singapore developer has agreed to invest in Lippo Karawaci as well. The funds will be used for partial repayment of debt obligations and rental obligations for its REITs. Both Lippo Malls Indonesia Retail Trust and First REIT have rental support in the form of master leases from Lippo Karawaci.
In FY2018, Lippo Karawaci and its units accounted for $79.61 million, or 68.5%, of First REIT’s $116.2 million rental income. For LMIRT, in FY2018, master leases from Lippo Karawaci and its affiliates represented 13.9% of total revenue, or $32 million. The underlying performance of LMIRT’s master lease space was just $7.4 million, or 23.2% of the master lease revenue.
Lippo Karawaci has said in its press release on March 12 and in its FY2018 annual report that it plans “to expedite preparations for the divestment of its mall assets”.
In March, Lippo Karawaci announced the proposed divestment of Lippo Mall Puri to LMIRT for IDR3,700 billion ($354.7 million).
In January, OUE Lippo Healthcare’s shareholders approved the purchase of Lippo Karawaci’s stakes in three hospitals, a medical centre and two clinics in Myanmar for $26.2 million. OUE, controlled by the Lippo group’s Riady family, holds 64.35% of OUELH.
Last year, Lippo Karawaci raised $202 million by divesting its stake in Bowsprit Capital — the manager of First REIT — for $99 million to OUE (60%) and OUELH (40%). The $99 million included a 7% share in First REIT. In addition, OUELH also acquired 10.6% of First REIT from Lippo Karawaci for $103 million.
More pipeline for First REIT
According to First REIT’s annual report, it has the right of first refusal to Lippo Karawaci’s pipeline of healthcare properties in Indonesia and to OUELH’s properties. In Indonesia, three hospitals that are First REIT’s pipeline properties are completed.
OUELH’s properties include the Myanmar assets, 13 Japanese nursing homes, and hospital assets in China that have yet to be completed. The Japanese and Chinese assets were valued at $383.9 million as at Dec 31, 2018.
First REIT’s assets, which are valued at $1.35 billion based on their master lease rentals, include 12 hospitals, two integrated hospitals with malls, one integrated hospital and hotel and one integrated hotel and country club, three nursing homes in Singapore and a hospital in South Korea. First REIT’s gearing (net debt-to-asset ratio), based on the $1.35 billion valuation, was 35.3% as at Dec 31. Gearing excludes
First REIT’s $60 million of perpetual securities, which the REIT classifies as equity. The perpetual securities’ first call date is in 2021. In FY2018, First REIT announced a DPU of 8.6 cents, and for 1QFY2019, DPU is 2.15 cents. On April 10, First REIT was trading at a DPU yield of 8.68%.
DPU yield may remain high, as OUELH is likely to be keen to divest its assets into First REIT, given its stressed financials.
Auditors flag risks at OUELH
OUELH’s auditors qualified the $383.9 million valuation of the Japanese and Chinese properties. “Significant judgement and estimates are involved in determining the appropriate valuation methods and assumptions applied in the valuations. A small change in the key assumptions applied by the valuers such as the discount rate, terminal capitalisation rate and capitalisation rate can have a significant impact on the valuation,” the auditor’s statement says. The valuation was based on management’s current proposed development plan, that OUELH gets regulatory approval and that OUELH wins its litigation cases, the auditor, KPMG, adds.
“[OUELH] was involved in several ongoing litigations and claims, and provisions relating to legal and related expenses of $42.1 million were made as at Dec 31, 2018. There are uncertainties as to the possible outcome of these ongoing litigations and claims, and the eventual outcome may be subject to change, which can affect the amount of provisions made,” the auditor continues.
Then, there is the amount owed from “deconsolidated subsidiaries”, including those in Australia. Management has provided $21.7 million (unchanged from 2017) of allowance for impairment on other receivables from the deconsolidated subsidiaries. The recoverability of these amounts is dependent on the outcome of five ongoing legal suits that the company and the deconsolidated subsidiaries have with certain lenders, the auditor states.
OUELH announced a net loss of $18.9 million in FY2018, substantially less than FY2017’s $89.99 million, but cash outflow rose to $157 million.
A more immediate acquisition
Puri Mall is Lippo Karawaci’s flagship mall and very popular. Still, LMIRT is likely to lean on its unitholders to raise equity for the purchase. Including income support, Puri Mall’s net property income yield is 9.41%, which is higher than LMIRT’s existing portfolio yield of 8.94%. “We note that Lippo Karawaci has already been falling behind on rental payments to LMIRT and the vendor support increases the exposure of LMIRT to Lippo Karawaci,” OCBC Credit Research cautions.
LMIRT’s DPU for FY2018 was 2.05 cents, but this could be diluted to 1.37 cents, according to LMIRT’s own calculations, if it issues 1.47 billion units priced at 12.03 cents each to fund the acquisition of Puri Mall.
Minority unitholders have a choice and will be able to vote — and decide whether to buy the mall.
This story appears in The Edge Singapore (Issue 877, week of Apr 15) which is on sale now. Subscribe here
