I used to write in the past that First REIT is one of those good REIT that investors should investigate why it is so good.
It was one of the examples that I used to explain what experienced real estate investors look for when selecting the properties to put their money into.
The price was pretty fair at 6% dividend yield not too long ago but in recent times the share price have fallen.
Per my Dividend Stock Tracker, we can see the dividend yield is 7.3%.
Now that to me is attractive territory, not because of the yield alone.
When you evaluate a stock, you got to take in the whole package, whether the business has quality or there are some aspect that is negative such that it trades at this valuation.
And for First REIT there is definitely some overhang.
Not too long ago, it was announced that
- OUE Lippo Healthcare to acquire 10.63% of First REIT for S$102 mil
- OUE Lippo Healthcare to acquire 40% of Bowspirit Capital Corp for S$40 mil
- OUE to acquire the other 60% of Bowspirit Capital Corp for S$60 mil
It would seem on the surface that ownership have changed but it will still remain in the Indonesian owner’s hands.
If you add this with the rights issue to acquire OUE Downtown by OUE Commercial REIT, then what these transactions do is that they seem to be indirectly funding Lippo Karawachi.
Lippo Karawachi is the parent of First REIT, a developer who is also the largest owner and operator of private hospitals in Indonesia.
The tenants of First REIT’s Siloam hospitals is Lippo Karawachi. First REIT have various 15 year triple net master lease with Lippo Karawachi. These are very solid lease with a possibility to extend it for 15 more years.
When each master lease is signed, Lippo agrees to pay First REIT shareholders in SGD at an exchange rate pegged at the start of the lease.
This means that First REIT shareholders do not suffer from the brunt of currency fluctuations over the years, compared to REITs with properties paying foreign currency rental. The closest example is how the weakening Rupiah partly killed Lippo Malls Indonesia.
But there is always a cost to these currency fluctuations. It is who will bare the cost.
In this case, this currency cost is borne by Lippo Karawachi.
Per a report on Siloam hospitals, it shows the amount of cost these rentals are to the hospitals. The model continue to work if the cost of rental is a manageable portion of the bottom line.
However, this is a difficult judge because Siloam Hospitals have frequently shown to have negative free cash flow. This is due to the aggressive model of plowing cash flow back into the business.
So given the recent deals happening and this information, are there any cause of concern?
First REIT announced their Q3 Results yesterday it does show some cause of concern.
The above shows the third quarter cash flow statement. We can see a marked rise in the about of trade receivables.
In the balance sheet, we can also observe a market rise in the trade receivables. First REIT did put out that YESTERDAY they received the rental payments amounting to S$17.5 mil. That was late.
To be fair this was not the first time this was brought to my attention. Some web blog, which I cannot remember also wrote about the increase in receivables.
Yesterday, we got wind of more unsettling news on Lippo Karawaci:
Lippo Karawaci’s offshore bonds sold off after Indonesia’s anti-corruption agency, Komisi Pemberantasan Korupsi, said that company officials had been detained in connection with an alleged bribery case.
The KPK said on Monday that a Lippo Group official had been charged in connection the alleged payment of bribes to government officials to procure permits for the company’s Meikarta township project in Bekasi.
Lippo Karawaci’s dollar bonds due 2026 fell 3.3 points today to a cash price of 66.8, implying a yield of 13.7%, according to Tradeweb.
CreditSights said the matter raised red flags about the company’s corporate governance, and came soon after Lippo Karawaci failed to file its financial results on time.
Perhaps this is a reason why the share price fell from $1.30 to $1.18. The recent weakness in the REIT market certainly contributed to part of this.
How should you read this?
We go back to my article on why these triple net lease properties are solid. A lot of the times, they are solid because the property are solid and the tenants are solid. The tenants is probably a large part of the valuation and their robustness ties to everything.
In this case, the uncertainty of the tenant have impacted the sturdiness of the REIT.
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Monday 20th of May 2019
i would have thought that an massive increase of 100,00 in current liabilities on the balance sheet would merit your comment . this increase represents an increase of almost 40% over the 2017 year end level. this trend is not a fact investors like to see and is worthy of an explanation!!
Monday 20th of May 2019
Oh I see.
Tuesday 23rd of April 2019
Dear Kyith, what is your take on First REIT now, months after your analysis and the discussion with the various investors above? The dividend yield and the unit price seems quite attractive for entry now. Thank you very much.
Sunday 28th of April 2019
Hi Padauk, it very much depends on your thesis about the rental picture after 2021. I think a lot of folks are speculating things will be alright or wish to pocket some short term high yield
Wednesday 21st of November 2018
Couple weeks slow.... Fool.sg talks about high Trade Receivable which you had wrote.
This report is after the stock tanks >15%.
Wednesday 21st of November 2018
Hi RN, are you saying that my article came late?
Tuesday 20th of November 2018
excellent analysis. UOE group has injected SD 202m into Lippo group which is significant unless the hole is way bigger.
the credit risk is with Lippo instead of Siloam.
Will First become the next RHT asset sales case ? Some fund investors ie CVCA pump in more money in Siloam to buy First reits assets at fire sale price and after that siloam doest have to worry on the rental and release Lippo on the SGD rental peg. Also the assets can be relist in Indo exchange which was intended last time.
Of source sales of major assets subject to approval of First reits shareholders. By selling down share price and buy back more, major shareholders and related parties can potential own much bigger state to vote in favor of the disposal.
The above is only a possible scenarios analysis and personal opinion only.
Friday 16th of November 2018
Tqvm for the article n insightful replies. Today 16th Nov d price has dropped to sdg1.11. Any comments on this? Tqvm n best rgds
Saturday 17th of November 2018
Hi TK Looi, I have no idea why First REIT fell unfortunately.