Posted on 04 Apr 2019
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FIRST REIT AGM 2019: 3 Things I learnt
So yesterday I attended my first AGM (coincidentally with FIRST REIT) which I have been a shareholder since 2017 happily receiving dividends of close to 8% Dividend yield for the past 2-3 years.
Side note: You can read more about the experience and atmosphere at the AGM.
A quick intro of FIRST REIT, it has a total of 20 properties (16 in Indonesia, 3 in Singapore and 1 in Korea) with a focus on privately owned hospitals. It’s share price tanked recently by around 30% in the second half of 2018 even though Distribution Per Unit (DPU) continued to increase gradually.
The plunge in share price was mainly due to a mini disaster which struck the company in second half in 2018 and if you were a retail investor or someone with an interest in REITs, would have immediately known about it as well. Basically the Sponsor of the REIT (Lippo Karawaci) changed hands to OUE (new Sponsor).
WARNING__: This is my own perspective, so please Do Your Own Due Diligence (DYODD) if you want to take an action moving forward.
Summary of FIRST REIT AGM 2019:
The headwinds for FIRST REIT do not look good
The old sponsor Lippo Karawaci (LK) is currently in a bad position with growing debt (and being hit by a credit downgrade to CCC, thus they recently sold off their stake in FIRST REIT and switched sponsors to OUE
Receivables have also increased, pointing to a growing debt position and refraining charging interest to LK as to not sour the relationship further
4 key lease contracts expire in 2021 and will definitely be re-negotiate with LK at poorer terms (due to the rupiah devaluing since the first contracts)
Further Insights and details:
The Siloam hospitals themselves are doing well with a very healthy rental ratio when it comes to paying LK
However, the pay structure between the Siloam hospitals and Lippo Karawaci are in Rupiah but they pay the Bowsprit, the manager of the REIT in SGD
They will thus re-negotiate a new contract then but the depreciation of the Rupiah is also a negative sign for the new contract terms
In the past, with the strong sponsor LK, they could survive on a rental support (paying a discounted rent for the difference in the foreign exchange rate)
This means that in the coming 2 years before the lease renewal, the management would have to really do their best to steer the REIT to safety (in terms of diversifying out of Indonesia, which is core on their plan and agenda
But that would also mean taking on more debt which means increasing the gearing ratio of now (35% to maybe closer towards the 45% mark)
Was looking at First Reit vs Parkway Reit to decide which one would be my first entry to healthcare sector. Eventually, I decided on Parkway Reit as First Reit had 3 inherent weakness that I am personally not comfortable with regardless of how well it performed in the past & possibly into the future.
1.High concentration risk in One Country: Indonesia
Its Singapore & S.Korea portfolio is negligible compared to its Indonesia ones. Indonesia its not a country thats quite well regarded when it comes to policy consistency (look at the change in tax-policy effect on Lippo Mall Reit). Persistent rupiah devaluation to sgd since the start of 2000s, this means that any forex hedging exercise undertaken would still had its limits once it expired. Those who are affluent would always go to Singapore, Thailand etc where the quality of healthcare is better & the scenery is more pleasant.
If the portfolio already had a high geographical concentration risk, the last thing I will like to see its a high tenant concentration, regardless how reputable/blue-chip the tenant is.
So in essence, once the 30 year lease finished its course, the land along with the facilities on top of it would be in the ownership of the government. So whether the lease can be extend/renewed with resounding confidence is a question mark. I rather not take the chance.
I like hospitals!
Economy good or bad, people sick still need to go see doctor! Got money no money...
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