[Edaily Marketin, Reporter KIM SUNG-SOO ] Following its full impairment of 125.6 billion won in goodwill, JR Global REIT faced another setback when its external auditor issued a “disclaimer of opinion.”

This decision was based on the determination that significant uncertainty regarding the company’s ability to continue as a going concern has not been resolved, which, under Korea Exchange regulations, constitutes grounds for delisting.

Amid this crisis, the company is continuing its ARS (Autonomous Restructuring Support) debt restructuring process while accelerating the sale of its Manhattan office in New York and loan refinancing to secure liquidity.

Audit Opinion Withdrawn… Grounds for Delisting Arise

According to the financial investment industry on the 27th, JR Global REIT announced that on the 22nd, its external auditor issued a “disclaimer of opinion” regarding its 14th-term financial statements. The external auditor determined that there is significant uncertainty regarding the company’s ability to continue as a going concern. Consequently, this constitutes grounds for delisting under Korea Exchange regulations and procedures.

plans to file an objection and submit a remediation plan to address the relevant procedures. It intends to resolve the grounds for delisting through a re-audit or an audit for the next fiscal year. Regardless of the qualified audit opinion, the company plans to proceed as scheduled with normalization procedures, including an automated response system (ARS), a bondholders’ meeting, and approval of a debt repayment plan.

Previously, on the 21st, JR Global REIT held an emergency board meeting and resolved to write off the full amount of 125.6 billion won in goodwill reflected in its financial statements. At the board meeting, three members voted in favor and one voted against.

The company explained that this impairment was based on an accounting judgment reflecting uncertainties, such as local litigation, identified during internal and external audits. It maintains that “goodwill impairment” is an accounting loss on the books that does not result in a direct cash outflow and does not directly affect the funding for the ARS or the debt repayment plan itself.

Currently, JR Global REIT’s primary focus for normalization is “securing liquidity.” To this end, the company is proceeding with the sale of its core asset, the property located at 498 Seventh Avenue in Manhattan, New York.

JR Global REIT is an overseas-type REIT managed by JR Investment Management that was listed on the Korean stock market in August 2020. The structure involves the parent REIT, JR Global REIT, investing in subsidiary REITs, which in turn invest in overseas real estate or securities of local corporations whose underlying assets are overseas real estate.

Currently, the subsidiary REITs are “JR No. 26” and “JR No. 28.” JR No. 26 holds the “Finance Tower Complex,” a landmark building in Brussels, Belgium, as its underlying asset, while JR No. 28 holds the “498 Seventh Avenue” office building in Manhattan, New York, as its underlying asset.

Manhattan Office Building Listed for Sale… Securing Liquidity

The “498 Seventh Avenue” building in Manhattan, New York, is an office building located in Manhattan, New York State, with one basement level and 25 above-ground floors, and a total gross floor area of approximately 27,037.7 pyeong.

It is reported that some offshore investors and major pension funds have expressed interest in this building. An “offshore investor” refers to an individual or institution that invests by placing funds or establishing a legal entity in a third country (offshore region) other than their home country, where tax benefits or financial regulations are more lenient.

However, discussions have not yet progressed to the stage of submitting a Letter of Intent (LOI). JR Global REIT is stepping up its sales marketing efforts while simultaneously negotiating loan extensions with local co-investors.

It is also working on loan refinancing. JR Global REIT is discussing the refinancing of senior loans with major overseas commercial banks and private equity funds. It is also exploring the possibility of refinancing through domestic financial institutions.

The Finance Tower in Brussels, Belgium, is also a key asset in the normalization process. Currently, JR Global REIT is negotiating the extension of the lease agreement with the Belgian Building Management Agency, the existing tenant.

Due to the nature of the government agency involved, specific details are confidential and have not been disclosed. The company’s board of directors is receiving regular updates on the progress of the negotiations. The company plans to make an announcement immediately upon the conclusion of the negotiations.

Foreign exchange risk management is also underway. To reduce financial burdens and the risk of exchange rate fluctuations, the company has proactively settled a portion of its foreign exchange hedging contracts. The remaining contract with Hana Bank expires on November 1 of next year; the contract amount is 314 million euros, and the applicable exchange rate is 1,443.35 won per euro. Reflecting this, the total amount is 453.2119 billion won.

The company is also addressing cross-default and EOD (loss of the benefit of the term) issues related to local loans. The lending syndicate had unilaterally asserted EOD regarding negotiations to extend the maturity of JR Global REIT’s local subsidiary’s foreign exchange hedging contracts.

However, JR Global REIT states that there are no disruptions to the operations of its local subsidiary and plans to take legal action, such as filing for a preliminary injunction, should the lending syndicate assert EOD again. The company is also preparing to refinance the local loan.

Regarding the Finance Tower in Belgium, there was also the variable of the “withdrawal of the rights offering.” Financial authorities and the underwriting syndicate had demanded that the lending syndicate first submit an appraisal report, but the related procedures were suspended when Knight Frank, which had been tasked with the appraisal at the time, withdrew from the project.

At the time of the annual shareholders’ meeting in late March, the company determined that dividend payments would be possible since the lending syndicate’s appraisal results had not yet been released. However, the company explains that the situation has since changed due to a larger-than-expected decline in asset value and the occurrence of a “cash trap.”

Exiting the ARS Program and Implementing the Debt Repayment Plan Are ‘Key’

A proposal by Korea Investment & Securities to extend 40 billion won in debt was also reviewed by the board of directors but rejected. This decision was made after considering the legal risks that could arise if the proposal were accepted, given the uncertainty surrounding the repayment of publicly offered bonds.

The company maintains that the lawsuit filed in the UK was an unavoidable choice to protect shareholders. The necessity of the lawsuit was determined after consulting with domestic and international legal advisors, and the related costs are being settled under an arrangement whereby JR Global REIT, which filed the lawsuit, bears the litigation expenses.

The company also emphasized the responsible management practices of JR Investment Management, the asset management firm. Currently, JR Investment Management is not receiving management fees and plans to begin receiving them once REIT operations have normalized. Regarding overseas business trips by board members, the company explained that there was only one visit to inspect assets in Belgium.

Regarding dividends, the company is pursuing a plan to repay the approximately 22 billion won in dividends owed to shareholders in the same manner as repayments to creditors. The proposal to convert cash dividends into stock dividends is scheduled to be discussed at a future board meeting.

JR Global REIT has stated that it accepts responsibility for the current situation and will make normalization and debt repayment its top priorities.

Oh Nam-soo, CEO of JR Global REIT, emphasized at a shareholder meeting on the 18th, “I deeply regret that the company has been forced to file for rehabilitation proceedings,” adding, “We will reflect reasonable proposals during negotiations with all stakeholders, including the creditor group and public bondholders, to expedite our graduation from the ARS program and the normalization of the REIT as much as possible.”

Whether JR Global REITs can return to normal operations is expected to hinge on a combination of factors: securing liquidity and refinancing loans through the sale of the Manhattan office building; implementing a debt repayment plan; and resolving the grounds for delisting resulting from the auditor’s refusal to issue an opinion.

The key issues are whether interest from potential investors in the Manhattan building will translate into an actual sale and, simultaneously, whether the company can successfully address the two challenges of maintaining its listing and graduating from the ARS program.