I just saw something shocking from an analyst report by Phillip
Securities Research on 7th October 2019 with regard to First REIT.
Basically, the uncertainties over the lease renewal of expiring hospitals and a
hotel in 2021 seems to be the main cause of the low unit price despite the completion
of the fund raising via rights issue exercise by Lippo Karawaci to resolve the
previous rental default risk. Apparently, there is another significant risk of as much as 80%
income support deficit should the sponsor decides to leave direct negotiation
between Siloam and First REIT. This information is something very material
because if it is true, it means that in the worst case scenario, First REIT
maybe worth only 20 cents (by applying similar 80% discount to recent market
price of S$1.01) per unit since such principle will apply to all hospitals
tenancy agreements eventually.
The earliest lease expiry of 5 properties will start between August
2021 and December 2021. FIRST REIT will probably give some indication on
negotiation status and key renewal contractual clauses 1 year before the
expiry, that is at around August 2020 next year. Please see below screenshot.
Background giving rise
to the shocking analysis by the Analyst
According to the Analyst, Siloam hospital operations are on stable
footing and Lippo Karawaci could potentially step out of the lease renewal negotiation
and let Siloam and First REIT deal directly with one another. Lippo Karawaci’s
hospital operator division is known as PT Siloam International Hospitals
(“Siloam”) and is listed in September 2013 on the Indonesia Stock Exchange.
Lippo Karawaci owns 51% of Siloam and provides income support by subsidizing
80% of the rental for the hospitals.
Siloam is listed on the Indonesia Stock Exchange. In FY2018, rental
paid to Lippo Karawaci was IDR125.5bn (S$12.2Mil), which only constitutes 20%
of the rent paid to First REIT.
Now, not sure why is there such a thing as Lippo Karawaci
subsidizing 80% rental indefinitely for its hospital business division as this
does not make commercial sense. There must be a form of income recovery
somewhere from Siloam. Else it means that Lippo Karawaci is running a
substantial loss making business division perpetually. 80% free subsidy for
another legal entity is incredulous even if it is a related party business.
This also means that Lippo Karawaci had sponsored a healthcare REIT that has a
ticking time bomb inbuilt during its IPO many years back.
I have written in to First REIT investor inquiry email for further
clarifications to make light out of the whole enigmatic circumstances relating to the "income support" by sponsor.
Updates as at 18 Oct 2019- Reply from First REIT Investor Relation on the 80% sponsor income support.
Updates as at 18 Oct 2019- Reply from First REIT Investor Relation on the 80% sponsor income support.
The question is, are the hospitals making sufficient revenue to pay the same or substantially the same rent to FIRST REIT once LK bows out of the equation? The other question is whether they would continue to pay rent in SGD. If the new lease is IDR-denominated, the FX risk becomes quite unpalatable.
ReplyDeleteHi Edwin, good questions and good points. As of FY2018 left ard S$2Mil in net profits....hope its business will bring in more profits to pay rent. Most likely will be in IDR upon renewal and subject to forex. They may just want to pass on the downside risk to Singapore shareholders.
DeleteMy understanding is LK is paying way above market rate and subsidising the hospital. I don't like Indo biz governance in general, like to set up many subsidiaries, and transfer shares and money (interested party transactions) everywhere until I blur you blur. Sometimes it seems like take from right pocket and put into left pocket. Just my 2 cents. Not vested.
ReplyDeleteHi Henry, yup...you are absolutely right. Not very transparent at all in their governance. The whole Lippo OUE REITs, Lippo Malls all went on acquisition mode previously to pass money back to finance Lippo Karawaci. Then began fund raising themselves from Singapore Capital market.
DeleteI believe affected properties is only 22% of GFA. and I dun think it will drop 80%. and there is worry of paying with rupiah than sgd.
ReplyDeleteimpact will be limited if any and show a benchmark for future renewal but since there is more probably of a lower renewal. let market flush out any weak hands before buying when the bad news hit.
Hi Layers, thanks for sharing your thoughts...appreciate. I also think that the probability of 80% drop scenario is not likely but then again, dunno how bad the market will over-react once the draft proposal is unveiled. Saw that you have done up a lot of wonderful postings on REITs and other stocks which provides excellent insights and analysis. Have added it to my favorite blogs/websites listing.
Deleteanother recent such fear was during us tax reform. us reits like manulife n kep-kbs was hit badly
ReplyDelete