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Can Lippo Malls Indonesia Retail Trust Maintain Its 10% Yield?

With a trailing distribution yield of more than 10%, Lippo Malls Indonesia Retail Trust (SGX: D5IU) is currently the highest yielding REIT listed in Singapore. I believe the REIT is trading at a high trailing yield because there are indicators that point to the trust’s inability to maintain this high distribution in the future.

(Note: The trailing distribution yield is not the only factor to consider when looking at which REIT to invest in. Whether the trust can grow or maintain its distributions in the future will have a more significant impact on the overall returns that a unitholder can generate.)

New tax regulation in 2018

Lippo Malls Indonesia Retail Trust invests primarily in shopping malls in Indonesia. Unfortunately for the trust and its unitholders, new tax regulations in the country have resulted in having to pay a 10% tax on service and utility coverage charges.

These regulations have increased the REIT’s tax expense by S$1.6 million in the first quarter of 2018, eroding its profit margin and distributable income. These regulations will have a long-term impact on the trust’s long-term profitability.

Foreign currency fluctuations

The trust earns its revenue in Indonesian rupiah and gives out its distributions in Singapore dollar. As such, a strengthening of the Singapore dollar against the rupiah will have an impact on distributions.

In recent times, as the Singapore dollar has steadily appreciated against the rupiah, unitholders have been seeing lesser distributions. In the first quarter of 2018, despite growing its rental income by 7.3% in Indonesian rupiah terms year-over-year, its rental income declined by 1.7% when compared to the Singapore dollar. If the recent trends persist, unitholders are likely going to face further foreign currency headwinds that will eat into their distributions.

A poor showing in its most recent quarter

Lippo Malls Indonesia Retail Trust had a less than stellar start to 2018.  Distribution per unit for the first quarter of 2018 plunged by an astonishing 24% year-on-year. Higher operating expenses due to maintenance cost and a net allowance of doubtful debts were partly to blame for the lower distribution.

With the foreign currency fluctuation and the new tax regulations mentioned above, distribution per unit fell sharply, in spite of the strong revenue growth in rupiah terms. If annualised, distribution per unit would be 22% below 2017’s distribution.

The Foolish bottom line

An attractive trailing yield is not the only factor to consider when investing in REITs. It is crucial that a REIT can maintain or even grow its distributions.

I believe Lippo Malls Indonesia Retail Trust is unlikely to reach the heights of yesteryear due to the new tax regulations and depreciation of the Indonesia rupiah against the Singapore dollar.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.