First REIT's (SGX: AW9U) Share Price Plunged 30% This Morning: What Happened and What Should Investors Do?

On 28 December 2020, First REIT‘s (SGX: AW9U) share price started falling like a brick. 

It has thus far plunged around 30% and the healthcare REIT’s units are changing hands at S$0.28 apiece at the time of writing.

What happened to cause the sudden plunge in First REIT’s unit price?

More importantly, how should investors react?

Let’s find out!

First REIT to Restructure and Recapitalise Its Business 

Earlier in June, Lippo Karawaci Tbk, a major tenant of First REIT, said that due to the COVID-19 pandemic in Indonesia and its “material negative impact” on Siloam’s business, Lippo Karawaci will be starting a restructuring process with First REIT with regard to the significant rental support that it provides.

In Indonesia, First REIT’s underlying healthcare properties are operated by Siloam, a subsidiary of Lippo Karawaci.

The Indonesian government declared the COVID-19 pandemic as a “national disaster and extraordinary event”. Lippo Karawaci’s subsidies given to First REIT is “prohibiting spending to expand medical care and improve medical facilities across Indonesia”.

Under the current rental structure, Lippo Karawaci provides rental support which guarantees First REIT a certain rental income. This ensures that any decline in Siloam’s revenues would be topped up by the support provided by Lippo Karawaci.

The coronavirus disease has affected Siloam’s business greatly as it led to a drastic decline in patient volumes across the country.

Revenue in some Siloam hospitals have plunged as much as 40% to 50% year-on-year and Lippo Karawaci anticipates the impact to be significant and structural over the medium term.

Even before accounting for the decline in revenue as a result of COVID-19, the rental amounts for almost all the hospitals range from 30% to 100% of their gross operating revenue (at a weighted average of around 40%), a “level that is unrealistic to sustain and support”.

Furthermore, the rental support agreements have a currency peg component, which puts further pressure due to Indonesian rupiah’s depreciation.

With that as a background, First REIT confirmed, on 28 December, the restructuring of the master lease agreements that it has with its Indonesian hospitals.

Under the new proposed agreement, the master leases for First REIT’s Indonesian hospitals (including those under Lippo Karawaci) will be restructured as there’s a high probability of those leases defaulting under the current master lease agreements. This was initially made public on 29 November. 

Under the proposed rent structure, the rental currency will no longer be in Singapore dollars (SGD) but will be in Indonesian rupiah (IDR). 

First REIT is also looking to do a rights issue as announced today. 

It’s planning to issue around 98% of First REIT’s outstanding units to raise gross proceeds of approximately S$158.2 million. 

The rights issue will be on the basis of 98 rights units for every 100 units in First REIT held by a unitholder. The issue price will be at S$0.20 per rights unit.

First REIT’s rights issue is renounceable, which means that it is transferable, and therefore can be bought or sold on the stock market. 

The proceeds from the rights issue will be used to repay part of First REIT’s 2018 secured loan facilities.

It added that the proposed rights issue is critical for First REIT to meet its debt covenants and avoid an imminent default of around 40% of the total debt due in March next year.

First REIT will hold an extraordinary general meeting (EGM) on 19 January 2021 for unitholders to mainly approve the restructuring of the master lease agreements under Lippo Karawaci.

Unitholder approval is required to enable First REIT to proceed with the proposed rights issue.

What Should Investors Do Now?

Given all of the above, investors in First REIT should ask themselves the following questions before deciding on the next course of action: 

• Is the proposed restructuring of the master lease agreements still attractive as an investor? 
• Can First REIT still grow its asset base and distribution per unit (DPU) viably over the long-term? 
• Are there better opportunities out there instead of holding onto your First REIT units and subscribing to the rights? 

To help answer those questions, you can also check out our latest analysis on First REIT (specifically the “Growth Prospects Check” subheading). 

Hopefully, the questions above will allow investors to think rationally and not dump their investment in First REIT emotionally. 

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.