If you are an S-REITs investor, (or even if you’re not) you may have heard by now about the entire ordeal surrounding FIRST REIT for the past couple of weeks. Not only has their unit price dipped from around S$1.20 to a low of S$0.922 last Tuesday, (of which some of those losses were recovered on Friday when it closed at S$1.03), the future of FIRST REIT was also recently riddled with uncertainties as issues after issues arise with their sponsor, key tenant and main revenue contributor, Lippo
A Background of Things
To put matters into context, First Real Estate Investment Trust or First REIT is a healthcare REIT which currently has 20 properties in its portfolio (namely 16 in Indonesia, 3 in Singapore, and 1 in South Korea), most of which are healthcare-related facilities.
Their sponsor, PT Lippo Karawaci Tbk, is Indonesia’s largest listed property company and is also their key tenant and main revenue contributor. In fact, it was recorded that Lippo Kawaraci and its subsidiaries contributed 82.4% of FIRST REIT’s rental income in 2017.
Even though FIRST REIT has always been a darling in the S-REITs market, they unfortunately had to bear the indirect brunt when their sponsor, Lippo Kawaraci recently got involved in a few unfavourable incidents.
1. Insolvency Issues
Even though the Indonesian developer has claimed to have taken “active steps to manage their liquidity and balance sheet position,” some are still concerned about Lippo’s reliance on asset sales to service their debts.
2. Bribery Rumors
Home of Lippo Group’s Deputy Chairman, James Riady was searched by anti-graft officials last month for suspected corruption/bribery around a development project in Indonesia by a Lippo Karawaci subsidiary. It was however, unclear whether the allegations were true.
3. Credit Rating Downgrade by Fitch
The credit rating for Lippo Kawaraci was cut down 2 notches by Fitch Ratings Ltd. (one of the three major credit rating agencies) from BB- to CCC+ this month due to possible liquidity risks caused by uncertainty over asset sales. Unitholders who have taken this move as a vote of non-confidence from Fitch, may have triggered the mass sell-off last week, causing the share price to dip to its lowest in 52 weeks.
Our REITs Expert Says….
While all of these seem like reasons to be concerned, especially for unitholders, our team checked in with our REITs expert, who is also a REITs investor for his views on the matter.
“FIRST REIT’s unit price may have dropped due to Lippo’s present increased risk of insolvency and bad publicity from the corruption charges involving the Riady’s.
However, as we know, there is really only ONE main risk for FIRST REIT.
They have neither currency risk (as they charge in Singapore Dollars) nor vacancy risk, but a COUNTERPARTY RISK.
Seeing as the sole tenant for FIRST REIT is Lippo, it is certain that their insolvency will affect FIRST REIT.
However, in my opinion, what Lippo is facing may only be short-term cash flow issues. Considering the fact that they have taken multiple steps to solve this, for example, selling FIRST REIT shares and manager to OUE, I do not believe that they will be insolvent and cause problems for FIRST REIT.
My only other concern is that FIRST REIT’S hospitals are on a 15-plus-15 years’ renewal and the first renewal is due in three years’ time. I believe that they are likely to renew the lease for another 15 years as the 4 hospitals are doing well. However, if they don’t, there may be uncertainty who the hospitals will be leased to and at what price. But that is a problem in three years’ time.”
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece has current vested interest of the company. Please consult a competent professional for expert financial or other assistance or legal advice.