On March 20, Lippo Malls Indonesia Retail Trust’s (LMIRT) manager announced it would not be paying distributions on its $140 million tranche of perpetual securities due on March 27.
Separately on February 24, along with its FY2022 results announcement, LMIRT’s manager announced it intended to cease distributions for the $140.0 million and $120.0 million perpetual securities, and it plans to appoint a financial adviser.
Distributions for perpetual securities for REITs are non-cumulative, and do not accrue, so investors will lose these distributions. In addition, because perpetual securities are further up the capital structure, a dividend stopper applies. That is, LMIRT won’t be paying distributions per unit or DPU either, till such time as the perpetual securities are redeemed, or the trust resumes distirbutions.
According to OCBC Credit Research, LMIRT is estimated to save a combined $42 millioin per annum from the distribution halt to unitholders ($23 million) and perpetual holders ($19 million). “It helps but is still far from sufficient to cover the huge maturity wall. More is needed to be done by LMRT to convince the lenders to refinance their debt,” OCBC Credit Research says.
This year, two tranches of term loans of $67.5 million mature, along with a revolving facility of $7 million. Next year, a term loan of $82.5 million matures, and so does is US$231.8 million bond.
“We believe leniency and patience from banks and bondholders are required at this time. Based on our assumptions of LMIRT’s operating cash flows before changes in working capital growing by 12% a year in 2023 – 2027, a zero distribution to unitholders and perpetual holders and benchmark Sora interest rate increases to 5%, the net cash flow generation is still insignificant in 2023 – 2025,” OCBC Credit Research says. This cash flow generation just isn’t enough to cover total debt (excluding the perpetual securities) of $819 million, let alone other liabilities.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
As it is, LMIRT is trading at distressed levels. The REIT could have a couple of ways out of its predicament. It can sell some properties as the manager says all its debt is unsecured. Or, the REIT could raise equity either through a placement - which would massively dilute its current unitholders - or, like its sister First REIT, have a rights issue to defray upcoming debt maturities.
“We expect the company to be reliant on external funding and do not believe it has sufficient committed funds to address its refinancing risk,” OCBC Credit Research says.
The biggest flaw in LMIRT's structure is that it is trading in Singapore, with Singapore dollar and US dollar debt, but its assets are in Indonesia. To show alignment with unitholders, the sponsor and the manager should start by putting some of LMIRT's malls in Indonesia up for sale.
Foreign REITs may remain somewhat stressed as investors re-evaluate the merits of investing in these REITs. Singapore may be a REIT hub, but investors are left with the consequences.
