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First REIT: Hedging Inflation and Geographical Risks

A forumer over at ChannelNewsAsia was asking about how does First REIT handle the events of an earthquake?

Aging population trend is irreversible and it is going to get worst.
I am optimistic abt First reits business.

what i am only worried is earthquake in indonesia.

any one know whether Insurance is covered for earthquake?
(what i know is Insurance does not cover Act of God but there are insurance that covered against earthquake).

I thought that the best way to settle this is hear from the management’s perspective. Incidentally, the person that handles Investor Relations happens to be their Chief Finance Officer Mr Victor Tan.


I have 3 questions which i hope you can help clear up.

1. Since the majority of the assets of first reit is located in Indonesia and given Indonesia’s past history of being rather inflationary, are the management taking any steps to manage the income received from these assets in these aspect. And if yes, how is it done?

2. Indonesia is geographically located in a region where earthquakes are prevalent. What is the management assessment of the risks of these natural disasters hitting the properties First REIT has? Is there any hedge done to address this?

3. We have received a circular stating that First REIT will be exploring acquiring assets other than hospitals and healthcare homes. Does this mean that the available opportunities in these areas are limited and not yield accretive? What kind of returns can we look forward to for these new opportunities?

Was very impress by his response and would urge true investors to ask if they have any questions.

The replies from Mr Tan:

Thanks for your interest in our Trust.

And also thanks for your 3 very good questions, which I will attend my best to address them:

1) The income received from our properties in Indonesia are all from our Sponsor, Lippo Karawaci and they are all in Singapore dollars.

The billing is done in Singapore dollars term and the rental income received from them are also in Singapore dollars.

The base rent which is ascertain during IPO is set in Singapore dollars. The fixed increment is also based on Singapore CPI on base rent which is already in Singapore dollars. The variable increment is based on Indonesia properties gross revenue, which is in Indonesia Rupiah. However, we have already fixed the Singapore-Rupiah exchange rate during IPO time so any future fluctuation in the Singapore-Rupiah exchange rate has no bearing on this variable increment calculation as well.

In summary, the exchange rate risk is bear by Lippo.

I hope that answer your question 1.

2) So far, all our properties are in the Island of Java (i.e. 3 in Jakarta area and 1 in Surabaya), which typically is not so prone to earthquake. From my understanding, most earthquakes happens in Sumatra Island although there are a few in Java area. Our hospitals are built to withstand certain tremors althought may not be “earthquake proof”.

All our properties in Indonesia and in Singapore as well are adequately insured.

Especially, for our Indonesia’s properties, we ensure that our Sponsor, Lippo has provided adequate insurance against earthquakes.

3) The mandate that we are seeking from our unitholders, like your goodself is a general mandate that will provide us with the flexibility if there is opportunity that come along (i.e. good/yield accretive assets) that are not previously cover under our old investment mandate. Please be assured that we will continue to do our best to manage the Trust in the way that we have been doing since IPO.

I sincerely hope that address some of your points that you have in mind.

Please do not hesitate to email me or contact me again if you need any clarification or have any more questions.

Many thanks for your interest in our REIT again!

You have a good weekend!


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Wednesday 21st of September 2011

I searched thru the documents I read and extract the relevant portion below for your information (from First REIT announcement on July 22, 2011, slide 8): "First REIT to enjoy a variable rental growth component of 1.25% of total gross revenue of the four Indonesian assets in FY 2011, in addition to the annual escalation based on 2 times Singapore CPI (capped at 2%)"

So I am not sure if the 2% cap is for the CPI or the annual escalation.

If the 2% is for Singapore CPI, then the annual escalation will be 4% max. If it is for the annual escalation itself, then the company assume that SG CPI will be around 1% in normal situation.


Friday 23rd of September 2011

Hi Lim,

I think it is read as the CPI is caped at 2%. So if say currently they make more than 5% of last years revenue target and inflation is now 5%, their growth is 1.25% of this years revenue + 2%. thats all.


Tuesday 20th of September 2011

Early this year, I came across the rental renewal formula of First Reit in one of the First Reit documents. If I interpret the formula correctly, the CPI component is 2 times the CPI of Singapore and CPI is capped at 2.

My initial interpretation is that if SG CPI is 3%, then it is considered as 2%, and therefore the CPI component should be 4% which I think is a fairly reasonable way to address the inflation concern.

However, if the 2% is the cap for the CPI component, then it is assuming Singapore inflation rate should be 1% or below, which is not really a good deal.


Wednesday 21st of September 2011

hi Lim, if the inflation is 3%, the CPI component should only pay investors 2%. if it is 1% the CPI component will pay investors 1%


Thursday 28th of October 2010

probably early post but First Reit i feel has to do more to justify its price right now.


Thursday 28th of October 2010

Hi Drizzt,

It is strange that I did not read this blog post of yours before. I am gonna bookmark this and recommend this to anyone with similar questions. ;)

I see it is your second largest investment after Starhub.

First REIT is one of my favourites as well but my investment in it is relatively small.

I wrote a piece on First REIT too about the same time you wrote yours. ;)

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