First REIT Tumbling Prices: Crisis Or Opportunity?

First REIT had been a sort after real estate investment trust listed on SGX. Its average Price-to-Book ratio (PB ratio) hovered around 1.2 over the past five years. Like other sectors, the REIT saw a decline in performance due to Covid-19. If you look up yahoo finance, you will see the PB ratio to be 0.40. However, that’s not the reference we should look at, and we will discuss why below.

In fact, its unit price quickly rebounded to S$0.80 after tumbling to S$0.60 range during the March 2020 crash. However, the months that followed saw a further decline in its price to the current S$0.40 range. Yet, the general REITs or stock market have already seen partial or full recovery.

Why such a dearly held healthcare REIT is performing so poorly is attributed to the master lease restructuring proposal recently. This has fundamentally changed the economics for First REIT. The question is if the market has punished the REIT too severely or if the worst has yet to be seen?

First REIT Business Overview

Property Portfolio

First REIT's Property Portfolio

Source: First REIT Website Portfolio Overview

First Real Estate Investment Trust is Singapore’s first healthcare REIT that focuses on investing in a diversified portfolio of income-producing properties in Asia that are primarily used for healthcare and/or healthcare related purposes. 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).

The Trust has a portfolio of 20 properties across Asia, with a total asset value of S$1.34 billion, based on FY2019 valuation. These include 16 properties in Indonesia consisting of 12 hospitals, 2 integrated hospitals & malls, 1 integrated hospital & hotel and 1 integrated hotel & country club, as well as 3 nursing homes in Singapore and 1 hospital in South Korea.

First REIT's Revenue Breakdown

Source: First REIT Annual Report 2019 / Rental And Other Income Breakdown By Geography

You can see that the portfolio is heavily invested in the Indonesia market, marking up 95.7% of its FY2019 revenue. The hospitals in Indonesia are strategically located within large catchment areas of potential patients.

The leases for all its properties are under triple-net leases. This means that master lessees bear all operating costs relating to the properties including maintenance, insurance and some of the taxes.

Net Property Income And Dividends

It’s a stable business and the REIT’s manager is committed to distribute 100% of taxable income. You can see that both revenue and net property income have been stable. In fact, there’s consistent incremental gains over the years.

First REIT's Net Property Income Trend

Source: First REIT Annual Report 2019 / Revenue And Net Property Income Trend

The REIT’s focus on acquiring yield-accretive properties in the healthcare and healthcare-related industry results in the steady rise in income seen over the years. Below you can see the progress of the acquisition done by First REIT over the past decade or so.

Source: First REIT Annual Report 2019 / Share Price Performance

As a result of the proactive management of the Trust, First REIT has been able to increase its Assets-Under-Management (AUM) as well as the dividend Distribution Per Unit (DPU). The AUM and DPU stood at S$1.34 billion and S$0.084 respectively for FY2019.

Source: First REIT Annual Report 2019 / Assets-Under-Management and Distribution Per Unit

First REIT Balance Sheet

First REIT Balance Sheet FY2019

Source: First REIT Annual Report 2019 / Balance Sheet Snapshot

Its total assets and liabilities stood at S$1.43 billion and S$571 million respectively as of FY2019. This translated to a Net Asset Value (NAV) of S$856 million. As a result, NAV Per Unit worked out to be S$0.996.

Therefore, given the market price at S$0.42 per unit, financial data sites are reporting a Price/Book ratio of around 0.40. However, we will see that post restructuring, the NAV Per Unit as of FY2019 is no longer applicable. Thus, investors shouldn’t use this figure for consideration. More on this later.

First REIT Gearing

Source: First REIT Annual Report 2019 / Gearing Snapshot

We can see that the financials of the Trust were pretty healthy back in FY2019. Gearing of 34.5% is a relatively average figure for such REITs. It is below the 50% gearing limit imposed by the Monetary Authority of Singapore (MAS). Also, Net Property Income can cover interest cost by more than 5 times. So, generally, we can say that First REIT was very well managed based on what we have seen so far.

Covid-19 Impact On First REIT

First REIT Financial Highlights 1H2020

Source: First REIT 1H 2020 Unaudited Financials Presentation

We saw a substantial erosion in First REIT’s net property income in 1H 2020. It was down by 33% compared to the same period in the previous year. This is mainly due to a two-month rental relief extended to all tenants, which is similar across the industry. Consequently, the DPU dropped by a significant 46.5% as well.

However, we believe this is only a temporary effect. Once the pandemic is under control, especially with the vaccines production underway, rental income should return to normal level. But what’s worrying is the proposed restructuring of the master lease agreements. And this is going to change the fundamental economics of the Trust.

Restructuring of Master Lease Agreements

A quick background first. First REIT’s master lessees for its properties in Indonesia are mainly PT Lippo Karawaci Tbk (LPKR) and PT Metropolis Propertindo Utama (MPU). Together, they accounted for 72.1% and 9.7% of First REIT’s rental income and other income for FY2019. LPKR and MPU are facing liquidity pressure and financial stress brought about by the recent impact from Covid-19.

The proposed restructuring will affect 11 LPKR hospitals and 3 MPU hospitals. This will help to provide a sustainable path for First REIT by avoiding adverse consequences of a default by LPKR under the existing agreements.

In the event of default by LPKR and MPU, First REIT will need to incur much more time and costs. Dealing with the complications of enforcing legal rights in Indonesia will not be easy. This will completely destabilize the Trust and shareholders’ value.

The restructuring will also extend the REIT’s weighted average lease expiry (WALE) from 7.4 years to 12.6 years.

Currency Impact

Source: XE Currency Charts: SGD to IDR

Another important thing to note is that the leases for Indonesia were pegged to SGD originally, but now it will be pegged to IDR post restructuring. Leases for Singapore properties continue to be denominated in SGD, while lease for South Korea property will remain to be denominated in USD.

Note that SGD has been appreciating against IDR over the years. In fact, we estimate that the strength of SGD has a compounded annual growth rate (CAGR) of about 4.3% against IDR over the last 10 years. Therefore, this is definitely something that investors need to take note when assessing the investment potential.

Effect of Proposed Rent Structure

Using FY2019 figures, the impact of the proposed new rent structure can be summarised in the chart below.

First REIT's Proposed Restructuring

Source: First REIT To Restructure Master Lease Agreements of Indonesian Hospital Assets

Observe that the base rent for LPKR hospitals will drop by 37.1% to S$50.9 million. On the other hand, base rent of MPU hospitals will decrease by 48.7% to S$5.8 million.

The new base rent escalation will also be a fixed 4.5% annually. Previously, the escalation was pegged to 2x Singapore’s consumer price index (capped at 2%). This is mainly to buffer for the currency depreciation effect of IDR against SGD which on average dropped about 4.3% annually as we saw earlier.

The restructuring will remove the variable rent components that existed previously. The new rent structure will base on 8% of the preceding financial year hospital gross operating revenue if it exceeds the base rent.

Other assets including those in Singapore and South Korea remain unchanged. Therefore, if we add up the base rents (and variable rent for the other assets component) for all its properties, we will expect the new rental income for First REIT to be S$77.7 million assuming the same operating condition as FY2019.

First REIT’s Property Valuation Impact

Source: First REIT To Restructure Master Lease Agreements of Indonesian Hospital Assets

Understand that property valuation is derived mainly from the streams of future rental incomes that can be generated from the property. As a result, properties affected by the proposed restructuring will see a proportional drop in valuation as well.

The key impacts are mainly from LPKR and MPU hospitals, which saw a 34.2% and 44.8% cut in valuations respectively.

First REIT Financial Snapshot 1H2020

Source: First REIT To Restructure Master Lease Agreements of Indonesian Hospital Assets

The results for 1H 2020 were affected by the two-month rental relief extended to the tenants of its properties. We will keep this in view at the moment, as this is likely a temporary impact.

Potential Upside

What we want to highlight here is that, due to the newly proposed rent structure and consequent cut in its property valuations, the NAV Per Unit will drop from S$0.9964 reported in FY2019 to S$0.494. Therefore, the Price/Book ratio will be 0.85 based on the unit price of S$0.42. The reported Price/Book of 0.40 you see on financial data sites are not updated timely.

Suppose the Price/Book ratio eventually equilibrates to 1.0 – 1.2, that will translate to a target price range of S$0.494 – S$0.593. This represents a potential upside of 17.6% – 41.1%.

Potential Downside

Due to reduction in asset values, the leverage ratio is increased from 34.9% to 48.6%. This is pretty close to the 50% gearing limit set by MAS, which is not good from a financial standpoint. 

As a result, when refinancing for its 2018 Secured Loan Facilities of S$400 million, First REIT only got a new term loan facility of up to S$260 million. Lenders require the Trust to repay the difference of S$140 million. The Manager is still considering how to finance this.

First REIT Future Distribution Yield

First REIT Statements of Total Return FY2019

Source: First REIT Annual Report 2019 / Statements of Total Return

Let’s try to work out the potential sustainable dividend distribution based on the new structure.

Assuming the new proposed rent structure, we will expect rental income to be around S$77.7 million as discussed earlier. Using the property related cost figures from FY2019, we can expect the net income to come in at around S$43.7 million instead of S$82 million.

Assuming the same fair value losses, we will get a total return for the year to be S$37.1 million. We will use the Singapore income tax rate of 17%, instead of the figures for FY2019 that was adjusted. The total return for the year after tax will come in at around S$30.8 million.

Taking the outstanding units at 797 million as of FY2019, we can expect a sustainable dividend payout of about S$0.0386 annually. At the current unit price of S$0.42, this will translate to a dividend yield of 9.2%.

First REIT Risk vs Returns

We believe that the current situation boils down to how First REIT is going to finance the S$140 million shortfall from its term loan facility and the extent of default risk related to Lippo Karawaci.

If the Manager issues new units based on the price of S$0.35, that will translate to 400 million new units. This will be about 50% addition to the current 797 units, and consequently a dilution effect.

Hence, base on a total of 1,197 million units, the distribution payout will become $0.0257. This will equate to a yield of 6.1% based on the unit price of S$0.42. We saw that based on historical price and dividends payout, the market was accepting a yield between 6.5% – 8.5%. If market expects the yield to be near 8.5%, we expect further decline in its unit price by 10 – 30%.

On the other hand, if the Manager can restructure its finances, it will help support its unit price. However that will also mean a likely lower distribution due to higher repayments in the near term.

No doubt Lippo Karawaci is in financial distress, but it is in the process of disposing assets to manage the current liquidity situation. Of course, it comes with execution risk, and whether they can manage restructure their balance sheet timely.

It is difficult to entirely assess the risk associated with the master lessees at the moment. You may want to take some time to wait for clearer signals as things progress along before entering.

Insider Trades

However, on a positive note, we saw that the Manager has recently repurchased more units. We see this as a positive signal as they are closer to the issue on hand. They are likely able to have a clearer picture of how things will work out eventually. They know better whether their loan refinancing or management of its leases with Lippo Karawaci are progressing well.


To sum up, there may be much risk for First REIT pertaining to the restructuring proposal of rent with its master lessees in Indonesia. In addition, the potential dilution effect, if the Manager issues new units to refinance its term loan facility, is something investors need to be aware of. The potential downside risk is a further 10 – 30% decline from current unit price of S$0.42. The proposed escalation rent is likely able to buffer future depreciation of IDR against SGD.

Based on the new proposed structure, the Price/Book value is estimated to be 0.85 rather than the reported 0.40. Historical Price/Book ratio range around 1 – 1.2. The sustainable distribution yield should be around 6.1% – 9.2%. The potential capital upside is 17.6% – 41.1%.

What we think is that even if the worst case scenario results in First REIT having to liquidate its entire portfolio, its Nav Per Unit is still higher than the current unit price with a margin of safety of around 15%.

Future After Crisis

Source: First REIT 1H 2020 Unaudited Financials Presentation / Sponsors’ Pipeline of Assets

Given the great healthcare assets it got, we don’t think portfolio liquidation is a likely scenario. Also, given the Manager’s track record in managing the Trust, and its confidence shown through the recent repurchase of units from the market, First REIT should survive the current crisis.

Once the First REIT is out of the distress, it can continue to add yield accretive assets from its sponsors. It will have the Right-of-First-Refusal (ROFR) for Lippo Karawaci’s healthcare properties in Indonesia, and also OUELH’s healthcare network in other parts of asia. There, we are positive on the long term prospect of the Trust, albeit the temporary depressed price.

Hope you have a better view of First REIT now. Do share your thoughts below so we can learn from each other.

Keep learning and happy investing!

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