Dear Unitholders,
We are pleased to present the annual report of Lippo Malls Indonesia Retail Trust ("LMIR Trust" or the "Trust") for the financial year ended 31 December 2016 (FY2016).
The Indonesian economy grew 5.0% in 2016 amidst a slower 2.6% growth for the global economy. It was Indonesia's fastest rate of growth since 2011. The robust growth was underpinned by buoyant household consumption, structural and fiscal reforms and stabilisation of commodity prices. Given that domestic consumption was the primary growth driver, Indonesia was also relatively less affected by uncertainties and disruptions that roiled the global economy.
With the fastest urbanisation rate in Asia, Indonesia's urban population of middle class and affluent consumers continue to drive household consumption which contributes 55% to GDP . Rising disposable income, low inflation and government's economic policy packages have combined to boost consumption. According to market research agency, Nielsen, consumer confidence index for Indonesia for the third quarter of 2016 was the third highest in the world.
Strong household consumption patterns and rapid rate of urbanisation have and will continue to enhance vibrancy in Indonesia's retail sector which in turn will be a positive growth driver for the performance of LMIR Trust's retail assets.
LMIR Trust delivered a strong performance and continued to deliver increasing distribution per unit ("DPU") to Unitholders for FY2016. Gross revenue increased 7.2% to SGD188,066,000 (IDR1,807 billion) from SGD173,004,000 (IDR1,678 billion) in FY2015. The higher income could be attributed to positive rental reversions of about 7.0% during the year and full year contributions from Lippo Plaza Batu and Palembang Icon malls acquired in FY2015. Net property income similarly grew 8.4% to SGD171,860,000 in tandem with higher gross income.
Benefitting from higher rental incomes and effective currency hedging strategies, distributable income for Unitholders has been increasing steadily during the year. The DPU for 4Q FY2016 was 0.87 cents, up 1.2% compared to 0.86 cents from the quarter earlier. This marked the sixth consecutive quarter in which DPU has increased since 2Q FY2015. Total DPU for the financial year under review totalled 3.41 cents, representing annualised yield of 9.2%. This brought aggregate distributable income for Unitholders to SGD95.5 million, a year-on-year increase of 11.6% compared to SGD85.6 million for FY2015.
LMIR Trust's portfolio of quality retail real estate assets, strategically located within large urban communities with rising middle-class populations across Indonesia, provides a strong platform for generating stable returns and creating value for stakeholders. Nonetheless, the Indonesian retail market is constantly evolving, influenced by changing lifestyles of urbanised young middle-class consumers and increasing disposable income of families benefitting from steady economic growth. In this light, the Trust is focused on maximising the value of its portfolio through asset enhancement and implemention of innovative retail concepts to meet the changing needs of consumers.
During the financial year under review, the Trust successfully renewed or secured new leases covering 55,855 sqm comprising 6.6% of the portfolio's total net lettable area (NLA) of 851,850 sqm. Through proactive tenant engagement and rigorous marketing efforts, the Trust was able to achieve average positive rental reversion rate of 7.0%.
The 94.3% occupancy rate of the Trust's portfolio, compared to the industry average of 85.4% (Cushman & Wakefield: Retail Snapshot Q4 2016, Jakarta), also attests to the effectiveness of our sustained portfolio enhancement measures. LMIR Trust will continue to undertake refurbishing and upgrading works where appropriate, as well as launch initiatives to strengthen the position of our malls as the preferred destinations for shopping, entertainment, social and family activities, work and play.
The Trust will also strive to manage the tenant mix of the malls so as to meet the specific needs of consumers in the catchment areas and work with tenants on appropriate promotion events and activities to create greater buzz and increase footfall.
A portfolio of quality retail real estate assets is a keystone of our business. LMIR Trust is focused on investing and owning real estate in the retail sector that can generate stable income streams and deliver sustainable returns in the long term.
In this respect, we are pleased to inform that LMIR Trust successfully completed the acquisition of Lippo Mall Kuta in Bali on 29 December 2016. As the Trust's first foray into Indonesia's leading tourist destination, the Lippo Mall Kuta acquisition will not only enlarge the Trust's presence in the retail mall sector but also diversify its portfolio geographically and reduce asset concentration risks. In addition, the potential for revenue will be enhanced after the current asset enhancement initiative is completed. A hotel currently being constructed on top of the mall when completed by 2018 will increase tourist traffic and significantly enhance rental growth potential.
Over the years, LMIR Trust has made prudent financial management the hallmark of its strategy for long-term sustainable growth. Moody's investment grade rating of Baa3 for the Trust attests to the strength and stability of its capital structure.
In FY2016, the Trust continued to strengthen its capital base by diversifying its funding sources and restructuring of its loan facilities. On 22 August 2016, LMIR Trust obtained an unsecured term loan facilities of up to SGD350 million with green shoe option of up to SGD70 million. The facilities were partly used for the acquisition of Lippo Mall Kuta and refinancing of existing debt obligations. LMIR Trust also successfully completed the issuance of SGD140 million 7.00% subordinated perpetual securities under the SGD1,000,000,000 Euro Medium Term Securities Programme on 20 September 2016. The securities were listed on SGX-ST on 28 September 2016.
As part of its efforts to optimise its debt structure, LMIR Trust, on 4 October 2016, redeemed the SGD150 million 4.25% Notes which were due on 4 October 2016. The funds for the redemption came partly from proceeds from the unsecured loan facilities and the issuance of the subordinated perpetual securities. The Trust's gearing ratio as at 31 December 2016 stood at 31.5%.
A key strategy for growth is to identify and invest in revenue generating real estate in Indonesia's retail sector. Even as we continue to invest in projects and to explore partnership collaboration to drive growth, we will exercise prudence in reviewing and evaluating risks associated with any investment opportunity. We have always adopted a long-term value creation and sustainability perspective. While risks in business cannot be totally avoided, we will ensure that our vulnerabilities and exposure to unexpected changes in the macro economy, geopolitical disruptions and breach of internal controls will be reduced and appropriately managed.
In this respect, LMIR Trust has the support of its Sponsor PT Lippo Karawaci Tbk, the largest listed property company in Indonesia. With a stable of retail malls across Indonesia, PT Lippo Karawaci Tbk has and will continue to provide a pipeline of quality low-risk retail assets that LMIR Trust can consider for investment.
We are committed to deliver long-term value to our stakeholders. One of the essential elements of a sustainable growth framework is a high standard of governance and integrity. We believe that good governance enhances our competitiveness. In this respect, the Group and its employees have and will continue to uphold the highest standards of ethical practices, regulatory compliance and integrity. Over the years, we have developed a strong reputation of trust, credibility and reliability among our partners, tenants and stakeholders which stand the Trust in good stead for sustainable growth.
The outlook for Indonesia's economy for 2017 remains favourable. The economy is resilient, buoyed by robust domestic consumption, infrastructure development and economic reforms. The World Bank's projection for GDP growth in 2017 is 5.3%. The stronger growth will be supported by more robust private investment following monetary easing in 2016 and ongoing investment climate reform. The continued stabilisation of commodity prices, inflation and the Indonesian Rupiah (IDR) will further bolster growth.
Private consumption, accounting for approximately 55% of GDP , will continue to drive overall economic growth. According to the Association of Indonesian Retailers (Aprindo), retail sales posted 10% growth to IDR200 trillion (USD14.9 billion) in 2016. In turn, the outlook for the consumer market remains positive, driven by steady demographic and income growth. The vibrancy of the Indonesian retail sector was validated by its fifth ranking at the Kearney's Global Retail Development Index which measures the attractiveness of the retail sector in 30 developing countries with a minimum population of 5 million.
Indonesia's huge population (258.3 million in 2016) combined with a rapidly growing middle-class and affluent consumers (MACs) estimated to be more than 100 million, provide the driving force for sustained growth in the consumer market. In addition, steady economic growth and rising disposable income have increased consumer confidence. According to Nielsen's consumer confidence index, Indonesia improved to 122 points in the 3rd quarter of 2016, the third highest among 63 countries in the world.
A buoyant consumer market, steady influx of global brands and adoption of urban lifestyle such as the 'coffee culture' will underpin demand for retail space in 2017. The moratorium for licence issuance for new retail malls (with more than 5,000 sqm net leasable area) in Jakarta since 2011 will continue to keep supply to the minimal level, placing retail real estate owners and developers in a stronger position to maintain high occupancy and maximise rental income.
With the fastest urbanisation growth in Asia, the World Bank estimates that more than 68% of Indonesia's population will live in cities over the coming 10 years. As more urban centres sprout in cities outside major metropolitans like Jakarta, there is tremendous potential for retail real estate companies like LMIR Trust to tap growing opportunities in consumer markets in these urban centres. Our recent acquisitions of Lippo Plaza Batu, Palembang Icon and Lippo Mall Kuta are in line with the Trust's strategy to seek greater growth opportunities in fast-growing cities and provinces outside the cosmopolitan Jakarta area.
Going forward, the Trust will continue to leverage its resources and expertise to enhance the value of its portfolio and explore acquisition opportunities including appropriate properties from the Sponsor, PT Lippo Karawaci Tbk. All things considered, we are cautiously optimistic that barring any unforeseen circumstances, LMIR Trust will continue to achieve steady growth in FY2017.
We would like to express our appreciation to members of the Board of LMIRT Management Ltd for their expert advice and guidance in propelling LMIR Trust to another profitable year. We also wish to thank our tenants and business partners for their continued support and co-operation throughout the year. We are grateful to our Unitholders for their patience and confidence, without which we would not be able to implement our strategies to deliver stable returns to them. We would like to thank the staff for their contribution and hard work over the past year.
On behalf of the Board of LMIRT Management Ltd, we also would like to take the opportunity to express our heartfelt appreciation to Ms Viven Gouw Sitiabudi who retired from her role on 16 March 2017 as an Executive Director since the listing of LMIR Trust in 2007 as well as acting CEO in the last one year. She has indeed contributed and provided guidance throughout her years with LMIR Trust. Likewise, she has been invaluable in the expansion of the Trust's asset size and we wish her all the best and hope that she will enjoy her retirement
Finally, we would like to welcome on board Ms Chan Lie Leng who first joined the Manager as Non-Executive Director on 22 April 2016 and was later re-designated Executive Director on 1 January 2017. She was appointed as the new Chief Executive Officer on 16 March 2017. She brings into the organisation her strong commercial and management experience and we are confident that her leadership will strengthen the Trust's growth trajectory and ability to deliver greater value to our Unitholders with her wealth of experience and expertise. We look forward to working with her to bring LMIR Trust to the next level.
Mr Albert Saychuan Cheok
Chairman of the Board & Independent Director
Ms Chan Lie Leng
Executive Director & Chief Executive Officer