First REIT is currently trading below its NAV. It has fallen more than 40% from its peak of S$1.42 per unit. Even now, institutional investors and other retail investors have been busy selling of First REIT. From my analysis, the 5 key risk factors are as below:
(i) The default risk for rental payment due to a liquidity crisis faced by its sponsor and main tenant, Lippo Karawaci;
(ii) Non-renewal of master tenancy for some of the hospitals due in 2021;
(iii) As alluded to (ii), even if master tenancy were renewed, it maybe on less favourable terms such as being pegged to Indonesia Rupiah instead of Singapore dollars and subject First REIT to forex losses and
(iv) the new owner OUE Lippo might force upon First REIT to take up non-yield accretive asset healthcare assets. The track record isn’t pretty given the outcry over what had happened to the REITS under OUE. As a matter of fact, when the Riady family are on a war path for fund raising, bad things may befall shareholders….look at Lippo Mall Indonesia Retail Trust.
(v) shareholders need to keep significant spare cash on hand for upcoming rights issue for M&A. The management has set a target to acquire OUE Lippo healthcare assets to diversify its Indonesia asset base. If the rights are set at a huge discount and one does not have the sufficent fund to subscribe, then the holdings in First REIT will be severely diluted.
|Extract of Press Release of AGM of Lippo Karawaci|
I also believed that the Riady family has invested a lot in the medical equipment and doctors staffing the hospital healthcare segment for them to give it up easily. Renewal of the upcoming expiring master lease in 2021 should not be an issue.
This leaves us with issue (iii), (iv) and (v) to worry about. Victor Tan (CEO of Manager of First REIT) had shared some of his invaluable insights on a radio talk show before on some of the above-mentioned issues.
Anyway, if one believes in the long term prospects of healthcare services given the aging population, then I believe First REIT has a rather good growth storyline in place.
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