Will First REIT’s Unit Price Recover?
First REIT units were the worst-performing in 2020. The next 18 months will be keenly watched by investors, but the REIT’s manager is confident about Indonesia’s recovery.
While most healthcare assets have seen growth in capital values amid the pandemic, the unit price of First Real Estate Investment Trust (REIT), which has hospital assets mainly in Indonesia, languished at record lows.
Its units last traded (March 3) at S$0.21, down from S$0.89 a year ago. Rental income in the last financial year ended December 31 fell 30.9% to about S$79.6 million while its distribution per unit halved to S$4.15. Like most other REITs, tenant rental relief and the overall decline in economic conditions during the pandemic dealt a heavy blow to income.
However, First REIT’s poor showing is mainly due to Lippo Karawaci, its former parent and one of Indonesia’s largest real estate companies, which has 11 hospital master lease agreements (MLAs) with First REIT. These leases contributed about 72% of First REIT’s income in the financial year 2019.
Lippo Karawaci was adversely affected by Covid-19 and the falling value of Indonesia’s currency, the Rupiah. The company, whose CEO is third-generation John Riady, divested its stake in First REIT completely last year to raise cash for its operations. He is also a director of the Lippo Group.
First REIT is managed by First REIT Management Limited, which is 60% owned by OUE Limited and 40% owned by OUE Lippo Healthcare Limited (OUELH). OUELH, a unit of OUE, is also the sponsor or major shareholder of the REIT. Another shareholder and strategic partner of the REIT is Japan’s Itochu Corp.
Restructure of lease agreement
Late last year, First REIT agreed to restructure its lease agreement with Lippo Karawaci, which led to lower annual rental income for the leases. Under the changes, Lippo Karawaci will pay around IDR550 billion ($39 million) starting 2021, albeit at a 4.5% annual escalation versus the previous 2.0% and with a longer tenor, according to a Fitch report in January.
“We forecast overall rent support payments by Lippo to fall to around IDR800 billion in 2021-2022, from around IDR1 trillion in 2019,” it said. The revised agreement also excludes currency risk to Lippo Karawaci. The rating agency has revised Lippo Karawaci’s outlook to “stable” from “negative” as its cash flow rises following the lower rental payments, asset sales and property presales.
First REIT then undertook a rights issue to raise S$158.2 million to meet its debt covenants. After completing the rights issue, OUELH indirectly owns approximately 15.4% of the total number of First REIT units in issue, or about 246.9 million units.
“Through the recapitalisation exercise, our gearing will be reduced, and we will have a debt headroom in excess of S$300 million. This ensures that First REIT is well-placed to seize yield-accretive acquisition opportunities outside of Indonesia and drive diversification efforts either through our sponsor, OUE Lippo Healthcare Limited’s Pan-Asian healthcare network, which spans countries like Japan, China and Myanmar, or from third parties,” Victor Yan, the CEO of the REIT’s manager, said at its full-year financial statement presentation in January.
However, according to Moody’s credit outlook posted on January 29, Lippo Karawaci’s liquidity at the holding company level is “weak” over the next 18 months because of the maturity of its IDR970 billion short-term loan facilities. Nevertheless, it said Lippo Karawaci has a track record of rolling over its short-term credit facilities. “The company also has added liquidity
buffer from available-for-sale financial assets, largely its stake in Lippo Malls Indonesia Retail Trust. We expect Lippo Karawaci’s near-term refinancing risk to be manageable with its next major debt maturity only in 2025,” it said.
Regardless of Lippo Karawaci’s financial position, First REIT’s Tan expressed optimism on the REIT’s outlook, especially after unitholders passed its recapitalisation and restructuring proposal.
“The outlook of the healthcare sector is resilient both in Indonesia and globally. Additionally, we remain confident in First REIT’s future, given that we have a strong and reputable hospital operator, PT Siloam International Hospitals Tbk, which is the most progressive and innovative healthcare provider in Indonesia. We believe it will continue to outperform its peers in Indonesia, thereby generating long-term growth for our hospitals. With the proposed MLAs restructuring, First REIT will have greater certainty on its cash flows and valuations,” Tan added.