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SI Research: We Still Like First REIT Despite Its Struggling Sponsor

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Indonesian REITs have not been performing well of late, weighed down by the depreciating Indonesian Rupiah which in turn affected the amount of distribution paid out to unitholders. In contrast to Lippo Malls Indonesia Retail Trust which has plunged 31.3 percent year-to-date, First REIT’s 12.2 percent decline would have been considered mild. This is largely due to the latter’s Indonesia properties’ rentals being pegged to Singapore dollars to mitigate foreign exchange volatility. In spite of this, there are growing concerns in the market recently with regard to the weakening financial health of First REIT’s sponsor, namely Indonesia’s largest property conglomerate Lippo Karawaci.

Moody Downgrades Credit Rating Of Lippo Karawaci

On 19 September 2018, Moody’s Investors Service announced that it has downgraded the corporate family rating of Lippo Karawaci to B3, citing the latter’s weaker-than-expected operating cash flows at the holding company level and eroded ability to fulfill its debt servicing obligations. Indonesia’s property market has been pretty suppressed over the last couple of years, and the government’s move to raise interest rate in order to prop up the Rupiah could hurt sentiments further. The downgrade reflected Lippo Karawaci’s deteriorating liquidity as Moody expected the company to continue to generate negative operating cash flows in the next 12 to 18 months.

Shareholders’ alarms were not entirely unfounded. After all, Lippo Karawaci and its subsidiaries were major master leasees of First REIT’s properties making up almost 82.9 percent of the trust’s portfolio rental income. Should Lippo Karawaci fall, the impact to First REIT’s rental income and distributions would therefore be huge and devastating. This is a cause for concern and indeed worrying.

Fortunately, Lippo Karawaci has already taken steps to improve on its balance sheet. On 18 September 2018, the group announced the sale of its entire stake in Bowsprit Capital Corporation, manager of First REIT, to OUE and OUE Lippo Healthcare for a consideration of $98.9 million, as well as 10.6 percent stake in First REIT to OUE Lippo Healthcare for $102.7 million. As a result of Lippo Karawaci’s asset sales, the collective cash proceeds of around $201.5 million upon completion of the deals would be a much needed timely rain sufficient to tide the company over its cash needs until September next year.

Stellar Growth Since Inception

First REIT’s track record was nothing less than impressive. The trust made its debut through an initial public offering (IPO) on the Singapore Exchange at $0.71 a share in December 2006. Since inception, its assets-under-management achieved a strong 11-year compound annual growth rate (CAGR) of 15.3 percent to $1.4 billion, comprising a portfolio of 20 healthcare-related real estates across Indonesia, Singapore and South Korea.

First REIT - Pic 1

Source: Company’s Annual Reports

Likewise, First REIT’s performances in revenue and net property income over the last 11 years were no less remarkable, both of which grew at CAGR of 14.7 percent to $111 million and $109.5 million respectively.

First REIT - Pic 2

First REIT - Pic 3

 

 

 

 

 

 

 

 

 

Source: Company’s Annual Reports

To top it off, First REIT’s distribution per unit, which is what really matters to unitholders, rose steadily at a CAGR of 1.9 percent over the same period to $0.0857 in FY17. An investor who had subscribed for First REIT’s shares through its IPO and stayed invested throughout, would have already collected $0.8414 a share from dividend payouts. Not only had he recovered his initial capital from just dividends alone, but his returns will be multiple times over should capital appreciation be also taken into consideration.

First REIT - Pic 4

Source: Company’s Annual Reports

Outlook Remained Optimistic

First REIT’s growth hinges on the expanding healthcare market in Indonesia, which is driven by the country’s massive 260 million population, infrastructure development and burgeoning middle class. According to BMI Research, healthcare spending in Indonesia is projected to balloon from IDR403.9 trillion in 2017 to IDR1224 trillion by 2027. Furthermore, increasing nationwide adoption of the national health insurance scheme also encouraged more demand for private healthcare. Against this backdrop, the outlook for First REIT remained promising.

OUE Lippo Healthcare is principally involved in the development, management and operations of healthcare facilities in Japan and China. Now with OUE Lippo Healthcre coming in into the picture, First REIT will have the opportunities to tap into the former’s portfolio of assets to expand into the well-developed network of healthcare facilities in Japan as well as the rapidly growing healthcare market in China.

We see First REIT’s recent transactions as merely changes to the ownership structure of the trust and its manager, rather than something that affect its operations. While recent news on Lippo Karawaci’s tightening liquidity could be disturbing, we foresee that a temporary weakness in its sponsor’s financial strength is unlikely to derail First REIT’s momentum given that from our understanding as of now, Lippo Karawaci has yet to make any delay on its end for payments to First REIT past their due dates. In view of the macro fundamentals trend going forward, we believe that the balance of possibilities would probably tilt in First REIT’s favour.

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