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Would FIRST REIT’s rental currency peg change

First REIT have been one of my longest held REIT and its been a rewarding ride. I probably seen its yield on my cost grew over the years to its current 9.62% (refer to existing portfolio here).  According to the well updated Dividend Stock Tracker it currently yields 6.23%.

AM Fraser initiate a report this week, stating that there are room for 28 property acquisition to add on to its current asset size, potential AEI to its earliest hospitals. They feel that there are room to go for First REIT.

Some how the report highlights the risk more than the advantages. The leases on the hospitals are 15 years with a Singapore CPI based rental growth rate. What we like is the predictability. And what seem so far away seems getting closer 8 years since IPO.

The risk AMFraser pointed out is that the lease may not be renewed but not likely so due to the quality of the assets. My take is that, it depends on whether the tenants, who are the parent Lippo can tolerate the rents.

The economic justification for leasing such a long duration is that rental as an expense becomes predictable and that is a bigger incentive for the hospital operators then other goals. This is similar to why blue chip charterers would want to charter from Singapore Shipping Corp.

The question is whether the incentive would be diminished.

Apparently a ground check with the management seem to assure AM Fraser that the upcoming rental renewal should not be lower than the current rental in SG terms. The fix peg to a particular SG rate is a big advantage for the First REIT share holders. You just have to see how Lippo Malls struggled with that over the years.

The conspiracy theorist in me can’t find a reason why these 2 REITs have rather different policy in this aspect.

We better hope the management is right on this. For the latest SGD vs INR rate trend, do take a look at this. Since 2006, SGD have appreciate like 59% to the INR. If I were Lippo i will ask for a repeg!

The impact to the rent would be drastic for one property. Over time the value of the REIT will reflect the aggregate of the future rental cash flow.

Will this happen or should we trust the management’s confidence? Something to think about for myself.

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Zheng Zhang

Sunday 18th of January 2015

I also feel puzzled that why LMIR and FIRST REIT adopt 2 different rental fee structure. Since S$ has appreciates so much against INR over the past few years, tenants of FIRST REIT's hospital in Indonesia must have felt the pain of rental surge. Will they still continue the rental currency peg or ask for a change?


Monday 19th of January 2015

Hi, that's the poker thought. If I were a businessmen would I do that? If they continue, what are the factors that make it so attractive for them to continue to do so

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