First REIT

[weijian]

After the restructure last year and the coming re-negotiations, the chickens are coming home to roost.

First Reit units tumble 21.5% after Lippo says it cannot sustain rental support

UNITS of First Real Estate Investment Trust (Reit) were sold down on Monday, after its former parent company Lippo Karawaci (LPKR) announced plans to start discussions to restructure its leases as the Covid-19 pandemic renders its rental subsidies to the healthcare Reit "...

https://www.businesstimes.com.sg/compani...al-support

[AQ.]

After the restructure last year and the coming re-negotiations, the chickens are coming home to roost.

First Reit units tumble 21.5% after Lippo says it cannot sustain rental support

UNITS of First Real Estate Investment Trust (Reit) were sold down on Monday, after its former parent company Lippo Karawaci (LPKR) announced plans to start discussions to restructure its leases as the Covid-19 pandemic renders its rental subsidies to the healthcare Reit "...

https://www.businesstimes.com.sg/compani...al-support

err...but Siloam just reported on May29 2020 its FY19 results

https://www.siloamhospitals.com/en/conte...20results/

• Gross Operating Revenue up +17.7% to Rp7,018bn 

• Net Operating Revenue up +17.2% to Rp5,262bn 

• Underlying EBITDA up +26.2% to Rp994bn 

• Operating Cash Flow increased +220% to Rp652bn 

• Net Cash Position increased 45% to Rp314bn 

• Underlying Net Profit up +251.4%% to Rp92.8bn 

Took a bunch of impairments for projects under construction though.

It's a fact that the subsidies were unsustainable - but:

1. The subsidies were given to support the high valuations used for sale of the properties in the first place. 

2. COVID certainly made the subsidies more unsustainable but COVID should not be made the excuse to avoid contractual obligations.

anyway - i'm not surprised this is happening. 

[Dosser]

Profit guidance from First REIT:

https://links.sgx.com/FileOpen/First_REI...eID=624297

Why hospitals should be adversely affected financially by a pandemic such that they need rental relief escapes me.

Exited last year amid concern over sustainability of rental support payments.

[weijian]

Profit guidance from First REIT:

https://links.sgx.com/FileOpen/First_REI...eID=624297

Why hospitals should be adversely affected financially by a pandemic such that they need rental relief escapes me.

Exited last year amid concern over sustainability of rental support payments.

It is for the sake of "long term relationships" that First Reit has built with all its tenants. Coincidentally, 16.4/19.6 = 83.7% of the subsidies go back to previous parent Lippo Karawaci.

https://links.sgx.com/FileOpen/First_REI...eID=624294

On another note, if we were to look at the regional hospitals around the region (Thailand, Malaysia and Singapore), most of these private hospitals have a substantial portion of their revenue dependent on medical tourism. With borders closed, medical tourism ceases. There is also the delay of non critical surgeries or treatments to cope with the then potential outbreak of Covid-19.

The Siloam hospitals will be dependent on inter-province medical tourism within Indonesia. With domestic flights only open again in June, the dearth of inter-province medical tourism probably is a significant factor.

[mobo]

Profit guidance from First REIT:

https://links.sgx.com/FileOpen/First_REI...eID=624297

Why hospitals should be adversely affected financially by a pandemic such that they need rental relief escapes me.

Exited last year amid concern over sustainability of rental support payments.

It is for the sake of "long term relationships" that First Reit has built with all its tenants. Coincidentally, 16.4/19.6 = 83.7% of the subsidies go back to previous parent Lippo Karawaci.

https://links.sgx.com/FileOpen/First_REI...eID=624294

On another note, if we were to look at the regional hospitals around the region (Thailand, Malaysia and Singapore), most of these private hospitals have a substantial portion of their revenue dependent on medical tourism. With borders closed, medical tourism ceases. There is also the delay of non critical surgeries or treatments to cope with the then potential outbreak of Covid-19.

The Siloam hospitals will be dependent on inter-province medical tourism within Indonesia. With domestic flights only open again in June, the dearth of inter-province medical tourism probably is a significant factor.

I strongly suspect the Singapore nursing homes do not require any real relief beyond the standard government pass ons. The likely reason why rental relief was given to everyone was for optics as giving relief only to the parent would stick out, but unfortunately this also means more minority unitholders' monies were given up then needed.

Although COVID is often cited by the parent as reason for unsuitability, that's not really the complete picture. COVID might have accelerated it, but the whole model was never sustainable to begin with. Rental support by Lippo was front loaded to an extent that is behemoth even by market financial engineering standards. By their own admission, there are hospitals within FIRST Reit that are paying out 100% of their revenue in the form of rental support! Lippo likes to pull such stunts as seen in OUEC and LMIR and some of the smaller REIT players do that from time to time, but I don't recall seeing anything that is of this magnitude.

Lippo initially wanted to get out of the existing tenancy agreements before they are due citing COVID and renegotiate at lower rates, it seems that after initial outcry they have decided it is better to achieve the same result by "value good relationship" tenant rebates. End result is the same though, FIRST is reverting back to the real underlying rents without support.

[weijian]

@mobo, sometimes we have to be subtle about certain things, lest VB gets into trouble for been too direct and some people (whether the company management or VBs who happen to self-appoint themselves to be robust defenders of their holdings) will threaten to sue etc etc. Believe the astute VB who has been following this thread or has taken time to read through and think, will still receive the "subtle" message in full. We avoid unnecessary trouble and still deliver the message.

But to be fair to Lippo, First REIT has had a good run since its IPO in 2006. Alot of shareholders did gain in the earlier years, irrespective of the price points in which they bought the stock. Some time back, I do remember specuvestor was still scratching his head on the deviation in performance between LMIRT and First Reit. Now it has been unveiled over the past 1 year - there is essentially no difference.

[starcraft_76]

FY2019 full year income - S$115.297 m

Refer to https://secure.fundsupermart.com/fsm/art...e-pressure
LK Group contribute 83.6% of rental
(80% of rental received from LK Group is from rental support)
Other contribute 16.4% of rental

Non LK contribution = 115.297 x 16.4% = 18.91m
LK Group contribution = 115.296 x 83.6% = 96.39m
Actual Rental from Siloam Hospital = 96.39 x 20% = 19.28m
=> exclude rental support, income (appx.) 19.28+18.91m = 38.19m

Expenses (FY2019):
Finance cost: 20.39m
Property Operating expenses: 2.403 m
Income Tax rate (appx) 22% => 38.19 x 22% = 8.4m
Perpectual Holder: 3.4m
Total : 34.5m

Income exclude rental support - Expenses above = 38.19 - 34.5 = 3.69m

With 3.69m left, after deduct for Management Fee and trustee Fee, it will be -ve?

What will be the following fee if rental support removed?
Management Fee: 11m
Trustee Fee: 0.43m


It is also reported that the rental fee paid by siloam hospital constitute avg 40% of hospital rental, which too high.
If the rental need to further reduce, the situation will be even worst.

[weijian]

The current lease agreement is already not on normal commercial terms. They are also considered "prejudicial" to the parent to start with. The review of leases will actually be reverting to normal commercial terms.

UPDATE ON LEASES WITH PT LIPPO KAWARACI TBK

In this regard, the Independent Committee will appoint an independent financial adviser (“IFA”) in due course, to provide advice as to whether any proposed rental restructuring would be on normal commercial terms and not prejudicial to the interests of First REIT and its minority Unitholders.

https://links.sgx.com/FileOpen/Update_on...eID=632233

[mobo]

Proposal of lease restructuring is out: https://links.sgx.com/1.0.0/corporate-an...tation.pdf

From the looks of things the DPU reduction should be approximately 65% compared to last norm in 2019. The rental currency will also be converted to IDR with a base escalation of 4.5%. Whether 4.5% is enough to cover the IDR depreciation on a long term basis remains to be seen.

[weijian]

Proposal of lease restructuring is out: https://links.sgx.com/1.0.0/corporate-an...tation.pdf

From the looks of things the DPU reduction should be approximately 65% compared to last norm in 2019. The rental currency will also be converted to IDR with a base escalation of 4.5%. Whether 4.5% is enough to cover the IDR depreciation on a long term basis remains to be seen.

From Google:

Jan2004 ~ 1sgd:5000IDR
Jan2020 ~ 1sgd:10300IDR (16 years later and before covid 19 kicked in)

IDR depreciated ~100% in the last 16 years and this translates to negative ~6.25% CAGR. Based on historical values, DPU will lose out slightly under 2% CAGR. Of course as usual, past history may or may not be a good indication of the future.

The presentation benchmarks the 4.5% escalation against Singapore CPI but it is probably a fallacy here to do so. The better comparison would be the Indonesian equivalent for CPI and I suspect this rate is probably going roughly match the future Indonesian CPI?

On the other hand, the detailed transaction announcement contains a lot more information and contains a lot of reasons why this restructuring has to go through (LK can actually walk away, no one wants to buy these assets, we are near to the refinancing in 2021 etc...). With the restructuring on normal terms now and provided it goes through, First Reit may actually look like an interesting investment thesis depending on how Mr Market looks at it.

RESTRUCTURING OF MASTER LEASES (detailed)
https://links.sgx.com/FileOpen/Transacti...eID=640830