First REIT's (SGX: AW9U) Share Price Plunged 21% Yesterday: What Happened and What Should Investors Do?
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First REIT's (SGX: AW9U) Share Price Plunged 21% Yesterday: What Happened and What Should Investors Do?

Sudhan P
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On 1 June 2020, First REIT‘s (SGX: AW9U) share price fell like a brick.

It plunged 21.5% to end the day at around S$0.70 (S$0.695 to be exact).

First REIT share price 1 June 2020
Source: Google Finance

At the time of writing on 2 June 2020, First REIT’s price fell a further 5% to S$0.66.

What happened to cause the sudden plunge in its price? More importantly, how should investors react?

Let’s find out.

Update from Lippo Karawaci 

Lippo Karawaci Tbk announced on 1 June 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.

What’s First REIT’s Take?

Following the announcement by Lippo Karawaci, First REIT’s manager released a statement saying that it has not been approached by Lippo Karawaci about the news release.

It also added:

“Given the declaration of the current Covid-19 situation as a national disaster by the Indonesia government, the Manager will consider any reasonable and commercially viable proposal from LPKR [Lippo Karawaci] carefully, with any agreement to be mutually agreeable and beneficial in the long term interest of First REIT and having regard to applicable legal and regulatory requirements.”

A Look at First REIT’s Leases

In 2019, the majority of First REIT’s rental income (at around 82%) came from Lippo Karawaci.

So, significant changes to Lippo Karawaci’s rental structure could affect First REIT.

First REIT rental income breakdown
Source: First REIT 2019 annual report

In the nearer term, out of First REIT’s 16 Indonesian properties, the master leases for four of its initial assets are up for renewal come December 2021. A few months earlier in August, the lease for Sarang Hospital in South Korea is also due for renewal.

First REIT lease expiry
Source: First REIT 2019 AGM presentation (dated 20 May 2020)

Collectively, the five assets took up around 27% of First REIT’s 2019 rental income. 

Property Annual rental
Sarang HospitalUS$0.7 million
(~ S$0.95 million)
Siloam Hospitals Lippo VillageS$14.7 million
Siloam Hospitals Kebon JerukS$8.4 million
Siloam Hospitals SurabayaS$3.3 million
Imperial Aryaduta Hotel & Country ClubS$4.1 million
Total from the five propertiesS$31.5 million
First REIT's 2019 rental income S$115.3 million

During the 2019 annual general meeting (AGM) held on 20 May 2020, First REIT said that “discussions on the leases are under way with all our stakeholders and we are evaluating all options to arrive at mutually beneficial terms to ensure a steady stream of income from these properties for our Unitholders”.

According to First REIT’s IPO prospectus, there is some downside protection to the lease renewal beyond the initial 15 years (emphases are mine):

“The term of each Master Lease Agreement is for 15 years with an option for the Master Lessee to obtain an additional lease for a further term of 15 years on the same terms and conditions save for the rent for the further term and excluding any further option to renew. The rent for the further term shall be at the then prevailing market rent, as may be agreed by the relevant Indonesian subsidiary and the Master Lessee. If there is no agreement by the relevant Indonesian subsidiary and the Master Lessee on such prevailing market rent, the rent for the further term will be based on the rent applicable to the 15th year of the term adjusted upwards taking into account the aggregated percentage increase of the consumer price index of Singapore for the 12 months comprised in the 15th year of the term.”

The rent for the Indonesian hospitals is also fixed for the duration of the lease term and paid in Singapore dollars at a rate of S$1.00 to Rp. 5,623.50.

Since 2006, the Indonesian rupiah has depreciated significantly against the Singapore dollar.

SGD against Indonesian Rupiah
Source: Google Finance

This sharp decline in the local currency has certainly put pressure on the Indonesian hospitals in First REIT’s portfolio.

What Should Investors Do Now?

As of 30 June 2019, Lippo Karawaci had a 10.5% stake in First REIT, but in February 2020, it fully divested its First REIT investment since it’s a non-strategic asset. Lippo Karawaci also raised its stake in Siloam by 4.3% to 55.4%. 

From First REIT’s 2019 AGM presentation, it looks like Lippo Karawaci is no longer First REIT’s sponsor. 

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

  • What does the restructuring process announced by Lippo Karawaci entail exactly?
    • Will First REIT be able to negotiate the five expiring leases according to rent applicable to the 15th year of the term at the very least?
    • Will the other master leases that have already been signed (expiring from December 2025 to December 2032) be affected too?
  • Have First REIT’s business fundamentals changed for the worse?
  • What’s the probability of seeing a permanent loss of capital with their First REIT investment?

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

At First REIT’s share price of S$0.66, it has a price-to-book ratio of 0.66x and a distribution yield of 11.3% (obtained by annualising 2020 first-quarter distribution per unit of 1.86 Singapore cents).

Want to Discuss Further?

Why not check out the Seedly Community and participate in the discussion surrounding REITs like First REIT (SGX: AW9U) and many more. 

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. 

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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