Target Price

Added 15k shares of $First Reit(AW9U.SI) @0.99 this week after the 4Q results release. The DPU is stable as expected, the main thing I was looking out for was the receivables. Although the receivables at 32.4m is higher than the 26.0m a year ago, it is much better than 49.3m last quarter. I have written about First REIT previously and why the share price have dropped due to the problems of the sponsor Lippo Karawaci, please see the link here: https://www.investingnote.com/posts/1030060
The share price have continued to drop since then and is at an attractive yield of above 8.5% at the price I added. I see the chance of LK defaulting on its obligations to FR at almost zero in the next few years. LK has started selling its assets and will continue to do so to raise cash to meet its operating cash flow requirements. As for its bond obligations, only US$75m is due in June 2020. The bulk of the bonds are due much later, US410m is due in 2022 and US425m in 2026. The IDR to USD exchange rate has recovered around 8% from its low in Oct 2018 although it’s still about 7% lower than a year ago. This has helped reduced LK’s debt burden.
One risk stated by some analyst is the possibility of non renewal by the sponsor when the first lease renewals are due. I think this also highly unlikely as the mature Siloam Hospitals are profitable and it’s not as if they can just move into a vacant building. Most likely the leases would be renewed but at a lower rental due to the declining Rupiah over the years. There are 4 properties due for renewal in Dec 2021. That’s almost 3 years from now, too far away to worry about now. Also one of the properties Siloam Surabaya is currently being redeveloped. The new hospital will be completed later this year so a new lease to replace the old one has already been signed. Another property is a hotel which I think would most likely will be sold off as it’s a non core business. Therefore I think the impact of the lease renewal is minimal, below 5% of distribution. The next batch of renewals is only in Dec 2025. That’s what I love about FR, very long WALE of 8.5 years.
The next risk mentioned is the raising of funds by the REIT to purchase assets from it’s new co-sponsor OUE Lippo Healthcare. FR did indicate interest in OUELH’s 12 nursing homes. The problem is the yields on these Japanese assets are very low, about 3% after interest payments compared with the current yields now. It will be very difficult for FR management to persuade shareholders to approve such an acquisition. As it is an interested persons transaction the sponsors cannot vote. Most likely the management will wait for the FR share price to recover first before any proposed acquisition so that the acquisition will not be too dilutive to the DPU. In the latest press release, they mentioned that the road map for expanding to other geographical regions is for the next three to five years. Meanwhile collect good dividends while waiting for price to recover. Please DYODD.

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I am still holding on.


nice view! thanks a lot


Short term unlikely to perform due to mkt not so rosy with LK and the new sponsor. I am waiting to Jeep if it goes down to 94.5 cents and below


Reply to @Pizzaprata : Oic! Is gd to collect dividend while waiting! Hope it will turns out well

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I have same view except that I have no time to follow closely and see no reason to take on the risk for them despite not as high as most expected. So no longer vested and move on to Maple and Fraser families. Decision is good so far.


Reply to @lyndonwong : How many lots are you vested ? What is yr avg price

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Nice views you got there...


Reply to @Pizzaprata : I think one should cash out when the price recovers before being fed with not so accretive assets..

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I have been holding $First Reit(AW9U.SI) shares since 2011. It's one of only two Healthcare REITs in Singapore. Although most of it's assets are in Indonesia, it's rental income is in SGD or at a fixed IDR/SGD exchange rate. The REIT management is very good and have only made acretive acquisitions. They have grown the DPU by 22% since 2011. All it's properties are under master leases and it has a long WALE of 10.3 years. The earliest lease renewal is in Aug 2021. So why has the price of this REIT drop by about 11% in the past 6 months?
The answer is due to the counterparty risk from the sponsor Lippo Karawaci (LK). More than 82% of First Reit's rental income is from LK and it's subsidiaries. LK is one of the biggest developers in Indonesia. Unfortunately they have very ambitious plans and may have bitten off more than they can chew. They are building a new city centre at the eastern fringes of Jakarta called Meikarta. The US$20 billion mega project is facing problems, see: http://www.atimes.com/article/jakartas-sup...
In Apr 2018, Moody's downgraded LK to B2 due to "weaker than expected operating cashflow coverage for interest payments". Last year Lippo had interest payments of IDR 1.1 trillion which could not be covered by the company's cash flow from operations. With the fall in the IDR/USD exchange rate of around 10% year to date, LK's interest payment of it's USD debt would increase accordingly.
That's why LK had to sell all it's stake in the REIT manager and 10.6% of First Reit to OUE Ltd and OUELH Ltd to raise a total of SGD 202 million to improve it's cash flow. Unfortunately this was not good enough for Moody's which downgraded LK again to B3 last Wed. You can read the report here: https://www.moodys.com/research/Moodys-dow...
This is a double whammy for First Reit. Although OUE Ltd is a related company (it's majority shareholder is Steven Riady, son of Lippo's founder Mochtar), they have proven themselves to be shitty Reit managers. Their Reits like OUECT and OUEHT are known for making dilutive acquisitions from the sponsor.
Although LK is in no imminent danger of defaulting, I think things will get worse before getting better. Please DYODD.

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