Since the last quarter of 2018, First REIT share price has languished and plunged more than 25% due to the Indonesian corruption probe involving its sponsor and main tenant Lippo Karawaci. At the lowest point, it dropped to S$0.92 per unit which is substantially lower from the S$1.30 per unit days. The concern over potential rental default by Lippo Karawaci over its worsening creditworthiness cast a dark cloud over First REIT. The market situation is further exacerbated by bad news that the upcoming renewal of master leases of the first few hospitals due in 2021 will be on new unfavorable terms and conditions with regard to the use of Rupiah instead of Singapore dollars which will subject First REIT to adverse forex exposure.
With the announcement by Lippo Karawaci that it is intending to raise USD 1 Billion in funding to shore up liquidity and cut down bank loans, the risk of a potential default on rental payment to First REIT has been reduced significantly in the short term. Lippo Karawaci planned to raise US$730Mil via rights issue which will be fully underwritten by the Riady billionaire family) and another US$280Mil via the sales of Puri Mall to Lippo Malls Indonesia Retail Trust. The notable highlight here is that U.S investor George Raymond Zage and Hong Kong conglomerate Chow Tai Fook are committing and subscribing to US$70Mil of the rights issue. This clearly demonstrated the confidence by the other major shareholders that Lippo Group will eventually pull through this tumultuous period for their business.
The rights issue is slated for completion by the 1st half of 2019 and subject to shareholders’ approval at an upcoming annual general meeting next month on April 18, 2019. Out of the cash pool raised, US$290Mil will be set aside to pay rental for REITs as well as to fund debt interest payments. However, one point to take note of is that the capital injection is expected to finance business operations through till December 2020. If Lippo Karawaci property development business continues to go downhill for its US$21 billion Meikarta project in Indonesia, the risk of default will return very quickly. Investors will no doubt panic again and vote with their feet.
|Siloam Hospitals Bali- Indonesia|
|Pacific Healthcare Nursing Home @Bukit Merah-Singapore|
I am currently still vested in First REIT. However, since the market rally at the beginning of the year, I have been selling off part of my holdings at around S$1.10 to reduce my portfolio exposure to First REIT in the event that the sponsor goes bankrupt and default. With the release of the news of additional funding by Lippo Karawaci and also recent quarter good financial performance by First REIT, I believed that for the upcoming one and a half year, the prices should stabilize at the current level and I have begun buying back units at S$1.00.
Of course, the other issue with holding on to First REIT is that with OUE-Lippo Healthcare coming into the picture as a co-sponsor through the recent acquisition of the REIT manager (Bowsprit) as well as direct stakes taken up, the current management is looking to rebalance its portfolio such that up to 50% of its assets will be located beyond Indonesia within the next 3-5years. Based on assets under management of S$1.35 billion (98% in Indonesia and remaining 2% in Singapore and Korea) as at 31 December 2018, this means probably another S$265Mil to S$442Mil on average of rights issue per year over the next 3-5 years to complete the transformation. Investors holding on to FIRST REIT need to prepare themselves for rights issue out of their own pocket if they believe in this new business vision.
Last but not least, with the plunge in unit price and current high yield of 8.5%, it will be extremely challenging trying to get a similar yield accretive healthcare asset from OUE-Lippo Healthcare. Despite all these challenges on the ground, I look forward to the exciting growth story of First REIT and how it will revamp itself for the future under a proven Bowsprit management team with good M&A execution track record lead by their CEO, Victor Tan.
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