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QuestionsCategory: Exit StrategiesFirst Reit price drop 19% over the last 3 days. What would you do…
Steven Yap asked 3 years ago

First Reit price drop 19% over the last 3 days.  If FR is 5% of your portfolio, what would you do?

https://www.facebook.com/352565835119256/posts/692582357784267

Steven Yap replied 3 years ago

First Reit price has dropped a hefty 19.1% from $1.15 to $0.93 in the past 3 days. Hardly in Singapore’s 16-year old REIT history has a REIT dropped that much in just 3 days other than during the GFC in 2008. Even during the Sabana Sob Saga, the price decline was 60% over a period of 1 year. So what are the rumours making their rounds? FACTS Yes, LK has had 2 notches of downgrade by Moody’s n Fitch, but the same reports highlighted that their CF should be able to last till at least 3Q2019. From now till then, LK may be able to sell off 1 shopping centre while brotherly love OUE may sell-off its US asset to raise US$750 to help out. RUMOUR 1 – LK will default on FR rentals. Investors Note – If it does, it will entail a chain reaction on Siloam, OUE-related n LK -related companies. There is bankers gaurantee for 3 months rental, but if there is a immediate default, FR would need to make an immediate announcement. Tenant defaults on rental have affected REITS like Soilbuilt BT before, but price reaction was less than 4%. RUMOUR 2 – Rights issue coming as OUE Healthcare will dump lousy healthcare assets into FR Investors Note – Any acquisitions would need to seek FR shareholders n OUE n possibly LK have to abstain from voting. If it is going to be a lousy acquisition or too huge a discount for a rights, this option can be voted down. BEST GUESS WHY THIS MASSACRE IS HAPPENING – The pace and magnitude of sell-down is certainly coming from Institutions. It is apparent that institutions need to sell as LK rating has been downgraded. Otherwise, the fund managers have no room for defense why FR is still inside their portfolio. The selling volume in the past 3 days
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First Reit price has dropped a hefty 19.1% from $1.15 to $0.93 in the past 3 days. Hardly in Singapore’s 16-year old REIT history has a REIT dropped that much in just 3 days other than during the GFC in 2008. Even during the Sabana Sob Saga, the price decline was 60% over a period of 1 year. So what are the rumours making their rounds?

FACTS
Yes, LK has had 2 notches of downgrade by Moody’s n Fitch, but the same reports highlighted that their CF should be able to last till at least 3Q2019. From now till then, LK may be able to sell off 1 shopping centre while brotherly love OUE may sell-off its US asset to raise US$750 to help out.

RUMOUR 1 – LK will default on FR rentals.

Investors Note – If it does, it will entail a chain reaction on Siloam, OUE-related n LK -related companies. There is bankers gaurantee for 3 months rental, but if there is a immediate default, FR would need to make an immediate announcement. Tenant defaults on rental have affected REITS like Soilbuilt BT before, but price reaction was less than 4%.

RUMOUR 2 – Rights issue coming as OUE Healthcare will dump lousy healthcare assets into FR

Investors Note – Any acquisitions would need to seek FR shareholders n OUE n possibly LK have to abstain from voting. If it is going to be a lousy acquisition or too huge a discount for a rights, this option can be voted down.

BEST GUESS WHY THIS MASSACRE IS HAPPENING – The pace and magnitude of sell-down is certainly coming from Institutions. It is apparent that institutions need to sell as LK rating has been downgraded. Otherwise, the fund managers have no room for defense why FR is still inside their portfolio. The selling volume in the past 3 days –

Fri 3.3 m
Mon 4.67 m
Tue so far 5.64 m

Japanese institutions hold approximately in total 23 million of FR shares, so if all needs to sell, it is almost there. Key is if other institutions need to sell on the same down bandwagon.

6 Answers
Victor Chng answered 3 years ago

Hi Steven,
 
May I know what is your inital reason when you invest in First REITs?

Steven Yap replied 3 years ago

Low risk investment (not likely to lose significantly capital) and Sustainable and reasonable dividends as my retirement income.

Victor Chng answered 3 years ago

Hi Steven,

Thanks for sharing

 

I think most investor viewed FR as low risk becuase they are in the medical business which is reslient and on top of that their tenant pay them in Singapore dollar.

 

The issue of the company is that the agreement of paying Singapore dollar is going to expire soon in the next few years and the rupiah had depreciated against Singapore Dollar by a huge percentage. Hence, based on this fact the investment risk of FR had actually increased significantly which may be different from your initial reason of investment already.

Matthew replied 3 years ago

Hi victor, may I ask where can I find information regarding this agreement of paying in Singapore dollars which is expiring soon? thank you,

Victor Chng replied 3 years ago

Hi Matthew,

You can find it in the IPO prospectus of First REITs.

Under the Master Lease Agreements, the rental will be paid in Singapore dollars based on the predetermined exchange rate of S$1.00 = Rp. 5,623.5 fixed for the entire duration of the lease term. In this regard, foreign exchange adjustment arising from the lease has no impact to the total return. (This can be found under page 71)

15-year lease term with option for the Master Lessee to renew for a further term of 15years (This can be found under key investment highlights which means the master lease will end in year 2021)

Jieren Zheng answered 3 years ago

Thanks for sharing!

Jieren Zheng replied 3 years ago

I actually sold (it is about 3.7% of my portfolio)

Victor Chng replied 3 years ago

you are welcome

Chor Loo answered 3 years ago

Hi all,
I was a previous owner of this REIT as well (since IPO). Earlier years, I am of the impression that the Hospitals are paying rental to the REIT, which in turn, pays the investors.
Thanks to the team’s earlier article on the AGM, ie, about LK footing bulk of the payment and have not asked for Restructuring. I took action and was able to exit around $1.30.
When source of repayment changes, it’s time to revisit if it still makes sense to continue this position.
 

Victor Chng answered 3 years ago

Hi Chor Loo,
 
I think the issue is whether Lippo are willing to foot the SGD 70 million difference in rental if the rental renewal will to happen in the next 2 years. My personally opinion is that Lippo will probably will not match the difference hence the risk in First REITs is significant higher.

Matthew replied 3 years ago

Hi Victor, may i ask where was the 70 million difference in rental derived from? is it based on the current difference in exchange rate as compared to predetermined exchange rate of S$1.00 = Rp. 5,623.5 for another 15 years?

Victor Chng replied 3 years ago

Hi Matthew,

It is based on the amount siloam hospital is paying to First REITs and the current exchange rate converted. The amount is the difference in the rent received in First REITs and the actual amount Siloam hospital is paying at the current moment.

Do note that Siloam is a listed company in Indonesia hence you can see their financial statement.

Koh Ming Shao answered 3 years ago

I divested half  of my shareholdings. Based on what I know, LK is subsidizing 80% of the rental. According to the CFO, this model is not sustainable.  Also, FR’s receivables has been increasing and this is due to LK paying FR slightly late compared to the past where LK will pay FR 2 to 3 months in advance.

Ang Chor Loo replied 3 years ago

The fear for existing shareholders is non earning accretive deals for FR, as witnessed with the rest of the Group’s SG entities.