The unit prices of Manulife US REIT (MUST) and Lippo Malls Indonesia Retail Trust D5IU (LMIRT) pummelled new lows in March, signalling distress. Charts such as these would usually imply the end of the stock, but that is not necessarily the case for these two REITs. Indeed, they can be saved.
In the case of MUST, its manager simply acquired too many properties in too short a time, and it now needs to either regurgitate those properties that it cannot digest or raise equity.
LMIRT’s acquisition pace was more measured. However, the structure of the REIT — with Indonesian assets, risk-free rates and rupiah rental income and net property income — was simply not tenable for a Singapore entity, and not suitable for Singapore retail investors. Instead, unitholders of LMIRT may have paid a higher price for their assets than they could have paid.
However, this was disclosed in the IPO prospectus. LMIRT’s IPO prospectus back in 2007 clearly stated “certain Indonesian rupiah amounts have been translated into Singapore dollars based on the exchange rate of IDR5,908.2 to $1.” This was despite the average rupiah rate in 2007 at the time of the IPO being IDR6,155.4 to $1, which was also stated in the prospectus.
The problem with LMIRT is that it is a structured REIT. Its assets are in Indonesiam where the risk-free rates are higher than Singapore’s, with rental income and net property income priced in rupiah, and then translated into Singapore dollars. LMIRT’s unitholders are essentially investing in rupiah assets and taking on rupiah risk, hence the original high yield of 8% or so. The rupiah is now at IDR11,321 to $1.
Despite this loss in translation, in 2020, during Covid, LMIRT’s manager announced the acquisition of Lippo Mall Puri for the equivalent of $330 million, partly financed with Singapore dollars raised from a dilutive rights issue.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
On Feb 24, LMIRT’s manager announced that it planned to stop distributions on its $140 million perpetual securities and its $120 million perpetual securities. On March 20, LMIRT’s manager announced it would not be paying distribution for the $140 million tranche which was due on March 27. This triggered a dividend stopper, requiring LMIRT not to pay distributions on its units (DPU).
On March 6, LMIRT’s manager announced the appointment of Sterling Coleman Capital to advise on capital management. Similarly, MUST’s manager appointed Citigroup to undertake a strategic review. The task isn’t that complicated. Both REITs have three options or combinations of these three options.
These are: a placement that will dilute all unitholders; a rights issue that will dilute all unitholders but is a more fair distribution than a placement; and divesting properties. Interestingly, LMIRT has divested properties in previous years and surely it is still able to do that. MUST should also be able to divest properties. Many times in the past, MUST’s manager has said that the US is the largest, deepest market for commercial property.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
While investors await the Citigroup review with anticipation, all that has emerged, to date, is news from Korean media that Mirae Asset Global Inv B73 estments is in talks with MUST’s manager. In a Singapore Exchange announcement, MUST’s manager has said there is no certainty of a transaction:“The Manager wishes to emphasise that there is no certainty or assurance that any definitive agreements will be entered into or that any transaction will materialise from the current discussions.”
Interestingly, Mirae did not go through on a KRW4 trillion ($4 billion) purchase of International Finance Centre Seoul, according to the Korean press. Mirae had agreed to acquire the asset from Brookfield Corp (formerly Brookfield Asset Management) and paid a deposit of KRW200 billion after signing an memorandum of understanding with Brookfield, according to the Korean press. The parties are reported to be in litigation. Mirae had planned to set up a private REIT to finance the purchase but the permit was rejected, Korean media reports say.
