REITs are undoubtedly equity instruments with a high dividend yield that can provide a steady stream of income to investors.
This is because of tax regulations that require REITs to pay out at least 90% of their distributable income to unitholders as dividends, and the inherent income producing quality of their underlying properties.
Here’s a brief run through of Lippo Malls Indo Retail Trust listed on the Singapore Stock Exchange that offers a high dividend yield of 8.2%.
Lippo Malls Indo Retail Trust
Lippo Malls Indo Retail Trust (LIMRT) has a dividend yield of 8.2% based on the closing price of S$0.43 at end of Sept.
Lippo Malls Indo Retail Trust aims to be a premier retail REIT in Asia with all of their retail malls located in Indonesia.
With a total of 27 properties spread over Sumatra, Java, Bali and Sulawesi, LIMRT is well positioned to reap the benefits from spending by the millenial generation.
The main tenants by contribution of gross rental revenue in LIMRT are Matahari Department Store at 13.6%, Hypermart at 9.6%, Carrefour at 3.6% followed by Electronic Solution at 0.8%.
The top 3 tenants contribute 26.8% of the total revenue.
Similar to many other REITs, F&B takes up a large proportion of the REITs rental revenue at 19.3%, followed by fashion at 17.7% and Supermarket/Hypermarket at 13.8%.
Based on their 3Q2017 financial statements, gross rental income on a year to date basis has grown by 9.5% to S$124m from S$113m.
Gross rental income is higher mainly due to contributions of new acquisitions Kuta, Kendari and positive rental reversions of 2.9% for the portfolio.
Rental reversions for LMIRT has been positive every quarter since 2011 and averaging 10%.
Other revenue, comprising carpark and other rental income fell by 7.6% to S$24m on a year to date basis.
Even thought there was a decline, other revenue contributes just 16% of total gross revenue which is small compared to the REIT’s main income from retail rents.
The reason other revenue fell is because of the decline in carpark revenue. According to the REIT, there were various contractual arrangements with different carpark operators in the past.
In order to achieve cost efficiency and to benefit from the latest parking management technology, a new carpark operator was engaged to operate most of LMIR Trust’s malls for one year with effect from 1 January 2017.
Under the new contractual arrangements, the carpark operator absorbs all the carpark operating costs and is entitled to a portion of the parking revenue. This has resulted in the decrease in carpark income from S$19.6 million in YTD 2016 to S$15.6 million in YTD 2017.
Correspondingly, the carpark expenses, which form part of the property operating and maintenance expenses, have reduced from S$3.4 million in YTD 2016 to S$0.5 million in YTD 2017, resulting in a reduction in net carpark income by about 6.8% from approximately S$16.2 million in YTD 2016 to approximately S$15.1 million in YTD 2017.
Together, the increase in gross rental income and decline in other revenue netted each other to result in total gross revenue rising 6.3% to S$148m on a year to date basis.
On the expense side, land rental and property management fees rose by 6.4% and 41.5% respectively.
Property operating and maintenance expenses fell 64.7% to S$2.6m on a year to date basis due to the change in carpark contractual arrangement mentioned earlier.
After deducting for property operating expenses (comprising land rental, property management fee and property operating and maintenance expenses), net property income grew 9.4% to S$139m on a year to date basis.
Overall, the growth in net property income is healthy at a high single digit range.
Savings on future financial expenses
On the financing side of the REIT, interest income is a small item while financial expenses is much larger.
On a year to date basis, financial expenses fell a healthy 11.3% because of refinancing done with perpetual securities issued in Sept 2016 and June 2017.
The decline in financial expense is due mainly to the repayment of the following two mentioned bonds.
A S$150m bond due in Oct 2016 and S$50m bond due in July 2017 were refinanced by the issues of S$140m (Sept 2016) and S$120m (June 2017) issue respectively.
At a rate of 7% for the Sept 2016 issue and 6.6% for the June 2017 issue, the perpetual securities offered by LMIRT is higher than the rates for bonds and term loans of between 3 to 5% the REIT presently has.
This might portend a rise in financial expenses going forward due to the higher interest rate of LMIRT’s new borrowings.
This is by far the largest expense item followed by Manager’s management fees.
Increase in distributable income
After deducting all property, trust and finance expenses, and adding back non-cash items such as manager’s fee payable in the form of units, amount reserved for distribution to perpetual securities holders, depreciation, amortization of intangible assets, unrealized loss/gain on hedging contracts and foreign exchange, the amount available to distribute to both unitholders and perpetual securities holders rose 18% to S$84m on a year to date basis.
On a year to date basis, distribution to unitholders rose 5% to S$75m while distribution to perpetual securities holders rose to S$9.6m from S$0.1 mainly due to the issuance of perpetual stock by LMIRT.
On a distribution per unit basis to unitholders, there was an increase of 4% to 2.64 SG cents per unit on a year to date basis.
Distributable income has been rising for LMIRT because of their consistent positive rental reversions, furthermore the REIT’s occupancy has been consistently above 90%. In 3Q2017, occupancy was at 94.3%, higher than the industry average of 85%.
Expiry of anchor tenant leases
Though the 3Q results have been fairly positive to date, one should look out for the possible negative rental reversions for anchor tenants in 4Q2017.
Also read: 20.9% growth in results for Manulife REIT
OCBC’s report points out that they were initially optimistic on rental reversions for anchor tenant leases expiring in late 2017.
These leases were signed 10 years earlier before the IPO.
However, management has recently guided that the market rate are significantly lower than the locked in rates. This is leading OCBC to guide for a -25% decline in rental reversions.
However, this decline is for 10% of LMIRT’s leases. Based on their NLA of 872 sqm, this is about 87,000 sqm. Based on a total of 3,429 leases as of their 2016 annual report, this would be 342 leases which will have a decline in rental reversions.
The absolute number does look large.
[Also read: S$2xxk for a Bangkok property at Ideo Mobi Rama 4]
The history of this master lease arrangement can be found on note 31 of 2016’s annual report. Essentially, the retail malls Lippo Mall Kemang, Palembang Icon, Lippo Plaza Batu, Lippo Mall Kuta and retail spaces being Depok Town Square Units, Grand Palladium Units, Java Supermall Units, Malang Town Square Units, Mall WTC Matahari Units, Metropolis Town Square Units and Plaza Madiun Units are under a Master Lease Agreement.
These master leases were signed on 18 Oct 2007 and has expired in Oct 2017.
Notably, the rental support for Kemang Mall has also expired in 3Q2017.
The 4Q2017 results will show how the rental reversion will be like.
In summary, LMIRT’s 3Q results as follows
- Increase in gross rental income
- Increase in gross revenue
- Decline in expenses
- Leading to an increase in net property income
- Possible savings on financial expenses because LMIRT issued perpetual securities rather than bonds or borrowed from the bank
- Be careful with negative rental reversion for the master leased properties