First REIT Q3 FY2019 Performance Review- Does The Decline In Property Income Signal Trend Of Worsening Performance Of Siloam Hospitals?

It is interesting to see the financial announcement from First REIT shouting out "First REIT achieves stable DPU of 2.15 cents for Q3 2019". As with all marketing techniques, highlight the good extensively but downplay the bad news.  Despite maintaining the quarter DPU to 2.15 cents, rental and other income for the quarter dipped 1.5% YoY to S$28.8Mil as a result of lower variable rental component for the Indonesian hospitals. In addition, net property income dipped 2.5% YoY to S$28.3Mil due to higher property expenses for its South Korea and Indonesia properties.

Does the decline in property income signal trend of worsening performance of Indonesian Hospitals?

Results released does not seemed to be too well in terms of organic growth and maybe the start of a worsening trend. This will greatly affect what the expiring lease for 5 hospitals and hotel/Country Club can offer for upcoming rental renewal exercise. While CEO Victor Tan has mentioned that First REIT has a low gearing ratio of 34.5% as at 30 September 2019 and are reviewing options to make further yield-accretive acquistions to boost their portfolio, I have serious doubt on how they plan to achieve that given the current high dividend yield at the weakened share price. Also, the signal given off by the sponsor and manager of First REIT seems to be hinting at letting First REIT take on forex exposure in future by denoting the rental income of Master Lease Agreements in Indonesian Rupiah instead of Singdollars.

Lease renewal of 5 properties due at end of 2021- Bad vibes on the eventual release of results of negotiation in 2020.
The risk of First REIT renewing the upcoming expiring lease of the first batch of proprieties at 80% plunge in rental rates in the worse case scenario cannot be ignored. Till  now, I cannot comprehend why the Sponsor Lippo Karawaci would have agreed to lease from First REIT and then charge a heavily discounted 80% rental rate to its subsidiary Siloam Hospitals and Healthcare Group for the initial properties injected into First REIT. It just does not make commercial sense to me and is clearly unsustainable. I have a very bad vibe on how the negotiation will unfold. It is certainly not inconceivable that the results will definitely be an unfavorable decrease in rental rates. The only question is how massive is the discount which First REIT has to give to Siloam in order to renew the Master Lease Agreement.

Please see my previous post on this topic here: "First REIT Review PART 2- Super High Yield of Over 8% And Possibility of 80% Drop in Rental Income For Upcoming Renewal Of Expiring Hospitals".

Summary
Organic growth seems to be tapering off for First REIT. The unknown results of the negotiation of the expiring 5 properties have pushed up the risk premium and yield required by investors to 8.3% based on an annualised DPU of 8.6 cents per unit and pricing of S$1.03 per unit as at 8 November 2019 (Friday). I think that it will be hard to proceed with other potential M&A opportunities without a quick settlement of the expiring lease agreements issues.  The next quarter results are important to see whether the negative growth continues from Siloam hospitals.