First REIT(AW9U: SGX) fell to the lowest S$0.21 on Mar 05, 202, from S$1.32 per share on June 05, 2015. It is a close to 85% drop from the peak in price. Is it reasonable to buy? Let’s explore.
First REIT is a Singapore-Exchange-listed real estate investment trust from Dec 11, 2016. It’s a real estate investment trust running healthcare assets and related businesses.The trust seeks to provide a yield-accretive portfolio of assets to unitholders. Sustainable, growing income streams and long-term capital appreciation are the trust’s objectives.
First REIT’s market value is S$426 million. It has a total of 19 assets in Singapore and Indonesia. It is looking to increase its portfolio base, focusing on the fast-growing Asia Pacific region.
The trust’s manager is First REIT Management Limited. OUE Limited owns 60%, and OUE Lippo Healthcare Limited holds the remaining 40% of the company. First REIT has the first right-to-access to offers by PT Lippo Karawaci Tbk, the largest healthcare network of Indonesia, and OUELH. That means the trust has the priority in buying properties offered by the two healthcare groups.
The property manager is committed to paying out 100% of taxable income to unitholders.
The lease type is a master lease to all properties. The leasees bear all costs of running the hospitals.
What makes First REIT special is the trust ownership structure. The listed trust owns overseas assets through two layers of special purposes companies(SPC). The trust has direct ownership of the Singapore assets.
The nature of an SPC holds an asset only at a time. The company offers financial support to its holding assets like loans and bonds. The two layers comprise onshore special companies(Singapore registered) and offshore special companies(local registered). Their relationship is:
First REIT → onshore SPCs →Offshore SPCs → Overseas Properties.
The advantage is it makes support more flexible and convenient. Besides, it may reduce the legal liability caused by individual properties abroad.
First REIT has sixteen properties in Indonesia and three assets in Singapore under its management. Siloam Hospitals Group and Araduta Hotel and Resort Group are the operators of these assets.
Here is the distribution of the 19 properties:
|Countries||Name of Properties||Operators|
|Singapore||Pacific Healthcare Nursing Home @ Bukit Merah||Pacific Healthcare Nursing Home Pte. Ltd.|
|Singapore||Pacific Healthcare Nursing Home II @ Bukit Panjang||Pacific Eldercare and Nursing Pte. Ltd.|
|Singapore||The Lentor Residence||The Lentor Residence Pte. Ltd.|
|Indonesia||Siloam Hospitals Buton & Lippo Plaza Buton||Siloam Hospitals Group & PT Lippo Malls Indonesia|
|Indonesia||Siloam Hospitals Kupang & Lippo Plaza Kupang||Siloam Hospitals Group & PT Lippo Malls Indonesia|
|Indonesia||Siloam Hospitals Manado & Hotel Aryaduta Manado||Siloam Hospitals Group & The Aryaduta Hotel & Resort Group|
|Indonesia||Siloam Hospitals Yogyakarta||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Labuan Bajo||Siloam Hospitals Group|
|Indonesia||Siloam Sriwijaya||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Purwakarta||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Bali||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals TB Simatupang||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Makassar||Siloam Hospitals Group|
|Indonesia||Mochtar Riady Comprehensive Cancer Centre||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Lippo Cikarang||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Lippo Village||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Kebon Jeruk||Siloam Hospitals Group|
|Indonesia||Siloam Hospitals Surabaya||Siloam Hospitals Group|
|Indonesia||Imperial Aryaduta Hotel & Country Club||The Aryaduta Hotel & Resort Group|
Highlights of the Portolio
- Total Gross Floor Area: 353,569 sqm.
- Maximum number of beds/salable rooms: 5046
- Occupancy: 100%
What’s Happened to FIRST REIT?
The management did several things in 2020:
- A restructure of lease terms: Due to the pandemic, the major leasees were under challenging situations. The management offers significant concessions to the leasees. First REIT reduces the base rents by almost 40% and 50% required by LPKR and MPU hospitals.
- The management changes the variable rental part of the rent from fixed parts(S$2.9 for LKPR, S$0.1 for MPU) to 8% of the gross hospital revenue for the preceding year.
- Change of rental escalation clause: First REIT changes the rental escalation rate from 2x of calendar CPI for Singapore (capped at 2%) to an annual 4.5%.
- The REIT also changes the rental payment calculation to the higher of “the base or performance-based rent” from the “base+variable.”
- Total monthly security deposits have changed to eight months from six months.
- The payment currency becomes the Indonesian Rupiah from the Singapore dollar.
- The management asks for the “right issue” from unitholders. The “right issue” allows the trust to raise money by issuing new units. The number of units raised is about 98% of the existing ones. The amount is S$158.2 million. First REIT will use most of the money raised to repay the debt expiring on March 01, 2021.
- Lippo Karawaci Tbk(one of the main leasees) is in a dire financial situation caused by the pandemic. Three rating agencies: Moody’s, Fitch, and S&P, downgrades the company’s ability to repay debt due to the cash flow problem.
The year 2020 sees drastic changes to First REIT’s performance. Besides the restructuring of lease agreements with leasees, the management issues new units to raise funds. Let’s see the performance of the past five years for your reference:
|Rental & Other Income(S$M’)||107||111||116.2||115.3||79.6|
|Net Property & Other Income(S$M’)||105.8||109.5||114.4||112.9||77.5|
|Distribution per unit(DPU)(Sing. cents)||8.47||8.57||8.6||8.6||4.15|
The sum-up of the performance:
- The rental income and net property income see 30% of negative growth. The DPU is 50% less than 2019. The lack of performance is due to the outbreak of the pandemic.
- Yet, as the two leasees manage all the trust properties, the occupancy rate is still 100%.
- The property yield is 8.25%.
- The annual 4% escalation clause makes the rental reversion rate higher each year.
1. First REIT did the following in response to the loss of revenue:
- Sale of the South Korean property for USD4.52 million: The sale helps lessen the pressure and impact of the re-structure of two leases and expiring debts.
- Extension of usage rights of two lands for Siloam Hospitals Lippo Village: The Indonesian Government has approved extending rights to use the lands for another twenty years until 2042.
2. The approval reduces the risks and costs of future capital investments.
- Approval of land use: The extension of the Siloam Hospitals Surabaya in Indonesia until 2041 makes the income source more sustainable and predictable.
- Weighted average lease expiry: The duration of the portfolio’s weighted average lease expiry has extended from 6.4 years to 11.6 years. It helps the stability and continuity of incoming cash flows.
- Loan facility: Besides the amount from the rights issue, First REIT also secures a revolving credit facility of S$42.5 million and an accordion option of S$39 million from banks. The financing facility helps the First REIT weather the ongoing hard time it is facing.
- The leverage ratio: The leverage ratio lowers by 14.4% to 34.6% from 49%. A lower debt ratio favors future project financing and expansion.
What are the Risks?
1. First REIT may face five aspects of risks incurred:
- Income loss: Lippo Karawaci, facing a hard time ahead, may have difficulties in paying. Being the main contributor to the portfolio’s income, First REIT has a chance of rental defaults or risks losing a whole or essential part of the income source.
- Interest rate risk: The trust has heavy borrowing in supporting the business; it may face extra pressure in paying the debt if the interest rate rises. That may hinder the management plan of future expansion and financing.
- New rental calculation: The rent after re-structure, based on the higher of reduced fixed rent or performance for the previous year, may fluctuate and lose certainty. It may make the revenue, net property income, and distribution more unstable.
2. Unstable distributions to unitholders may be contrary against what the trust adheres to its principles.
- Currency risk: First REIT meets a new risk of the payment currency issue. All new rentals are in the Indonesia Rupiah rather than the Singapore dollars as before re-structure of the lease agreement. If the rupiah depreciates, it may cause a loss to the income.
- Dilution effect: The management raises new funds by re-issuing close to 100% of current units. It dilutes the benefits of current unitholders in terms of earnings and distributions in the future.
- Concentration risk: The principal lessee’s rent makes up more than 80% of the trust revenue source. The risk is enormous if Lippo Karawaci defaults or faces financial problems. The trust may have to force itself to face the same situation because a high financial correlation exists between two entities. Rating agencies or banks may treat and downgrade First REIT’s financial status.
Based on the information available, we think First REIT isn’t a good choice for investment. As the global health crisis is here to stay for a time, it becomes more difficult for the management to turn around the business in a short time.
Besides, it may have to face additional challenges like interest and currency costs. The dilution effect may further erose existing unitholders’ benefits whenever the “right issue” is necessary for the future.
New rental calculation hinders revenue and income growth. It is more uncertain for business growth. We may not treat it as an ideal investment unless it can improve the clients’ portfolio and currency risks.
- First REIT should diversify concentration risk from its client portfolio.
- First REIT should use hedge tools to protect from the currency risk incurred.
- The management should minimize dilution effects caused by the re-issue of new units.
- The trust manager should prepare and hedge against interest-rate rise by using swaps and other instruments.
- Regarding the lease contracts, the management should expect re-negotiations for better benefits for unitholders once the situation improves.
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