First REIT

[Greenrookie]

Another thing is actually First REIT raised SGD100bn of SGD denominated bonds in Q2 to pay for the hospitals. So its not entirely floating loans. But if the revenue, assets and debt are in different currency, the currency mismatch can cause signifcant losses next quarter.

Pardon my error, I look at 2012 AR, and 2Q loan figures, didn't felt the need to go further. their floating rate from AR iirc is 3.2-3.7%, fixed rate will be higher than this.

[KopiKat]

yep, thats my question, if the IDR plunges 10%, doesnt that mean the asset value of the Indonesian properties plunge by 10%, which means they probably would have exceeded the 35% regulatory requirements. Correct me if im wrong, but the regulatory requirements is 35% debt / property value.

Back in '09, original article from BT, posted in another site,

Reit managers here have been given more breathing space on borrowing limits by the Monetary Authority of Singapore (MAS), which has clarified how downward revaluations of properties should be treated.

Basically, MAS has said that Reits need not worry if their leverage has increased because properties have been revalued and are now worth less.

Under MAS's Property Fund Guidelines, an S-Reit's total borrowings and deferred payments (the 'aggregate leverage') should not exceed 35 per cent of its deposited property. This maximum limit is set at a higher 60 per cent if the Reit obtains a credit rating and publicises it.

In a circular to Reit managers and trustees earlier this month, MAS confirmed that if the aggregate leverage has gone up because of a decline in property values, it will not amount to a breach of leverage limits. MAS also made the important point that refinancing of existing debt by a Reit is not to be construed as incurring additional borrowings.

'So if at the point of refinancing, a Reit has to revalue its assets (which lenders will require), and so long as the refinancing is of existing debt, MAS will not consider this as additional borrowing and hence the Reit will not be in breach of the statutory leverage limit,' says Giam Lay Hoon, group general counsel of Oxley Capital Group, which owns a stake in the manager of Cambridge Industrial Trust.

MAS also said that it will permit Reits to raise debt for refinancing purposes earlier than the actual maturity of the debt to be refinanced, without having to include such funds raised in the aggregate leverage limit. However, this is 'provided that the funds are set aside solely for the purpose of repaying the maturing debt'.

'The trustee must place these funds in a separate trust account which shall be drawn on only to repay the maturing debt,' MAS said in its circular.

[Drizzt]

First REIT's CFO don't think these currency issues are a problem:

Question (from me):

It looks like currency wise, Indonesia may hit some headwinds. Currency depreciation are likely to cause valuation of First REITs properties to be revised downwards. First REITs debt to asset is very very close to 35%. What will likely happen when valuation gets revised down and the debt to asset breach 35%?

The weak currency will also act as a rental hike for First REIT's parent Lippo. Would there be any counterparty risk involved here (ability to pay rent)

Answer:

We have started the annual valuation process. As our rental income from Indonesia are all in Singapore dollars, we do not foresee any major impact on the devaluation of the Rupiah on the revaluation of our Indonesia properties.

We also do not foresee that our tenant, Lippo Karawaci would not be able to pay our rentals.

The valuation is using Indonesia discount rate and the Indonesia Currency is just one of the factors as there are many other factors (i.e. economic, political, etc) to consider in determining the appropriate discount rate to be used.

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Another thing is actually First REIT raised SGD100bn of SGD denominated bonds in Q2 to pay for the hospitals. So its not entirely floating loans. But if the revenue, assets and debt are in different currency, the currency mismatch can cause signifcant losses next quarter.

Pardon my error, I look at 2012 AR, and 2Q loan figures, didn't felt the need to go further. their floating rate from AR iirc is 3.2-3.7%, fixed rate will be higher than this.

If you factoring the cost to refinance at fixed rate it is likely that the cost of debt total will bump up to 4.2% plus but that is not end of the world.

Sabana and aims are fixed and they are at 4%+++

It just makes future acquisitions abit challenging.

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Was wondering why First REit fall 8% when lippomall only fall 5%, since hospital assets are supposed to be more defensive than malls, and First reit has 2 newly acquired hospitals in May, so all things equal, DPU will increase further in next quarter. Then I found out:

1) It gearing is 34.7% when it is not rated, that means there are only 0.3% away from debt ceiling!
2) All it loans are floated, which means "it can revised at a short notice" (words from AR)
3) Although rent is pegged in sing dollars, I am not sure if Indonesia properties can be valued at sing dollars, I know Lippomall valuation is done in rupiah and then convert into sing dollars, due to the weak rupiah, the malls valuation actually went up in rupiah terms, but after conversion, fall in value. Don't first reits assets need to go through the same conversion?

I feel a rights issue/ placement is imminent. Will stay away although I like the assets.

I still remember reading Shanrui comments about lousy management take the low interest rate to gear up for aquisitions. First reit fit this description perfectly. Disappointed, the price really need to be low for this to be a bargain, since the extent of dilution is unknown. Analysts are still issuing a buy call for this counter today

comments welcomed

yep, thats my question, if the IDR plunges 10%, doesnt that mean the asset value of the Indonesian properties plunge by 10%, which means they probably would have exceeded the 35% regulatory requirements. Correct me if im wrong, but the regulatory requirements is 35% debt / property value.

I also wanted to ask if the revenue is earned in IDR, SGD or USD. not sure whats the contract they have with Siloam Hospitals. Did they say that the revenue is earned in SGD????? if thats the case, then the valuation could also be in SGD too (the above point becomes in a way invalid).

Another thing is actually First REIT raised SGD100bn of SGD denominated bonds in Q2 to pay for the hospitals. So its not entirely floating loans. But if the revenue, assets and debt are in different currency, the currency mismatch can cause signifcant losses next quarter.

the base income and CPI pegged escalation is in SGD. there is a variable portion that is based on revenue earned by the hospitals, that is rupiah if i remember correctly.

[Dividend Warrior]

Thanks for sharing, Drizzt.

It is good that the CFO replied u directly.

I usually send my queries to the investor relation officer of a company.

[Drizzt]

Thanks for sharing, Drizzt.

It is good that the CFO replied u directly.

I usually send my queries to the investor relation officer of a company.

Victor the CFO does the investor relations for them.or that used to be the case. his reply usually is within 1-2 hours. i send this reply yesterday night at 12 am he replied like 6-7 am when i woke up.

[BlueKelah]

It is expected most REITs will be down when the interest rate is up.

First REIT is coming down very nicely. Should be back to 80 cents soon given the fear in the market.

Only difference now is that First REITs gearing is not low anymore as compared to last year before all the REIT fanfare and dividend yield hunting.

[corydorus]

Drizzt, thanks. Is informative.

[Greenrookie]

If you factoring the cost to refinance at fixed rate it is likely that the cost of debt total will bump up to 4.2% plus but that is not end of the world.

Sabana and aims are fixed and they are at 4%+++

It just makes future acquisitions abit challenging.

Thanks Drizzt for sharing,

4% is not a problem, but for Sabana and other reits who already have 100% fixed loans, what you see is what you get, for First reit, you need to discount the increase in finance cost from the DPU, and hence there is no accurate projection into future DPU, of course you can take the extreme case and assume they change all their loans to fix and work out the sums. Also, the problem is since they are already gear to to the max, my guess is:

The placement or rights issue that is coming will not be a small one, they will need significant cash to buy properties that will make a impact on the total valuation of properties to make gearing below 30% (Their target)again. Lets assume that want gearing to go down to 28%, they will need to raise 200 million to increase the property base. With about 705 million of units, that will be coincidentally about 28% dilution with a rights price of $1. and if they want to make allowance for further gearing, or have a bigger discount, the bigger the placement/ rights

Of course, if they get good yield properties, and ask shareholders for rights, It might actually be a good thing if you have enough faith and money to subscript to all of it. Then they will be no dilution, but the extent of "discount" is still a risk (IMO). But if they do a placement then rights at a discount to shareholders, then dilution will happens regardless of warchest

If the use placement/rights proceeds to lower debt (I seriously think they won't), then its dilution without hope of DPU improvement...

Guess if one has money prepared for these and got First Reit at dirt cheap price, the gearing is not a issue, but I will give it a miss and look for details for their capital management before deciding whether it is worth the risk.

[Nick]

First REIT is not a new REIT on the block - its been around for over 5 years and we can get an idea on how the Management has used equity as a tool in the past. I believe previous M&A were funded partially by new equity (as private placements or payment to Sponsor). In both cases, the properties were acquired at a substantial discount to fair valuation so there were no dilution to the DPU - DPU actually increased ! The sole rights issue was well subscribed and those who participated did not see a dilution in the distribution yield. I don't think there was ever a case of them raising equity to repay debt.

(Not Vested)

[KopiKat]

For FirstREIT & LMIR, looking at just one single massive Rights Issue each, high chance that's their modus operandi.

In addition, the sponsor also started with ~20% at IPO, a low enough stake to give them flexibility to offer to take up unwanted rights (during bad times) and provide some price stability during such issues.