REIT ASIAPAC
L E G I S L AT I O N
Legislation
LIPPO GROUP’S BRIBERY
PROBE AND LIQUIDITY RISKS
PUT INVESTORS ON EDGE
Proceeds from Lippo Karawaci’s asset sales said to only
provide temporary relief
“We estimate that the added liquidity will only
be sufficient to cover the company’s cash needs
until September 2019 given the company’s cash
burn rate of around IDR1.1 trillion in 2018 and
around IDR1.3 trillion in 2019, and upcoming
debt maturities of IDR1.3 trillion in the rest of
2018 and 2019.”
negative outlook, from B2. It has also cut
the rating of retailer PT Matahari Putra
Prima, an affiliate of Lippo Group and a
tenant of LMIRT, to B3 from B2. is the executive chairman and major
shareholder of OUE Limited. OUE Lippo
Healthcare Limited is a subsidiary of OUE
Limited.
Concerning its tenant base, LMIRT
specified that its income derived from
Lippo Karawaci master leases accounted
for 10% of its 2018 gross revenue. The rest
of the related party tenants accounted for
around 17% of LMIRT’s gross revenue and
comprised independent retail focused
entities such as Matahari Departmental
Store, Hypermart and Timezone. OUE Lippo Healthcare has said that the
acquisitions are aligned with its strategy
to expand into the Pan-Asian Healthcare
market. However, some investors and
observers regard the purchases as a plan
to support the finances of Lippo Karawaci.
“These sales only provide Lippo Karawaci
a short-term liquidity boost and do not
address the fundamental weakness in
its property development business,” says
Poh.
First REIT is relatively more secure
compared with LMIRT, according to
Poh. “Under its master lease with Lippo
Karawaci, the rental expense has priority
over interest and debt, so there is little
rental default risk over the next 12
months.”
CORRUPTION PROBE
The recent bribery probe by the Indonesian anti-graft agency into Lippo Group
Deputy Chairman James Riady involving a $21 billion Meikarta's construction
project, touted as the “Shenzhen of Indonesia,” has shaken investor confidence
about the performance of the group’s related companies.
Notably, risk is seen in Singapore-listed Lippo Malls Indonesia
Retail Trust (LMIRT) and First REIT because their sponsor –
Indonesian-listed PT Lippo Karawaci, which owned companies
in charge of Meikarta’s development, had also been downgraded
several times by credit rating agencies as a result of stretched
liquidity.
“The weakening liquidity of Lippo Karawaci does impact
the two REITs (LMIRT and First REIT),” Jacintha Poh, a Vice
President and Senior Analyst at Moody’s, told REIT AsiaPac.
“LMIRT has a part of its tenant base affiliated with Lippo Group,
so there is some risk of tenant defaults or move outs.” Moody’s
has downgraded Lippo Karawaci’s credit rating to B3 with a
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In October, James Riady’s home was
searched by Indonesian anti-graft officials.
Separately, Lippo Karawaci announced
the sale of its 100%-stake in Bowsprit
Capital Corporation, which in turn is the
manager of First REIT and owns 7% of
its units, to OUE Limited and OUE Lippo
Healthcare Limited for S$99 million.
The company also sold an additional
10.6%-stake in First REIT to an indirect
wholly-owned subsidiary of OUE Lippo
Healthcare Limited for S$103 million.
Stephen Riady, James Riady’s brother,
Lippo Karawaci is Lippo Group’s real estate
development arm. It is a holding company
that owns assets to develop, manage and
sell, and some of these assets have been
sold to Lippo’s group of REITs. However,
Lippo Karawaci borrowed in USD to
support the growth of its subsidiaries, and
these subsidiaries did not guarantee the
debt nor pay out sufficient dividends to
cover the interest expense, explains Poh.
“Lippo Karawaci’s problem was less about
currency risk arising from borrowing in
USD and more about being financially
stretched because of its high gearing,”
she says. “We estimate that the added
liquidity will only be sufficient to
cover the company’s cash needs until
September 2019 given the company’s
cash burn rate of around IDR1.1 trillion in
2018 and around IDR1.3 trillion in 2019,
and upcoming debt maturities of IDR1.3
trillion in the rest of 2018 and 2019.”
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THE DOWNTURN IN
INDONESIA’S HOME SALES
The Indonesia residential slump in
2016 brought the issue to the fore as
Lippo Karawaci decided to suspend
new residential launches in the weak
market, she told REIT AsiaPac. “This
made creditors nervous as they couldn't
see a revenue pipeline to cover interest
expense which was running at about
US$120 million per year.”
The weak investor sentiment has
spread from the Lippo Group to entities
affiliated with OUE Limited, such as OUE
Commercial REIT and OUE Hospitality
Trust. Prices of units in the OUE REITs
plunged in the last quarter of 2018.
Lippo Centre, Hong Kong