First REIT Share Price Crash Again- Sudden Announcement of 2 Months Rental Relief to Hospital Tenants

On 20 July 2020, First REIT made a sudden announcement that it will be granting rental relief of 2 whole months for April 2020 and May 2020 to all its tenants in Indonesia, Singapore and Korea. This was a shocking announcement as it is only now that they released this announcement. This is not a good sign at all as it seems to imply that Lippo Karawaci Group is battling cashflow issues. Earlier in the previous month of June'20, Lippo Karawaci had announced that it wants to restructure the terms and conditions of all signed tenancy agreements as they are unsustainable (pls see First REIT's Sponsor Plan to Default on Original Rental Support Agreements). I believe that this rental rebate is a compromise between either breaking tenancy agreements which is as good as a nuclear option for all stakeholders or extending temporary rental relief while upholding the sanctity of legal contractual obligations.  

1. First REIT price collapse again.

As at 23 July 2020, First REIT unit price has dropped from S$0.72 per unit (before the 20 Jun 2020 announcement) to the current S$0.635 per unit. This is a drop of -11.8% within 3 days. The prolonged COVID-19 pandemic has brought about significant impact to all businesses globally including lowering the patient load at its hospital healthcare businesses. The future does not bode well for First REIT and its major tenant Siloam with income support by Lippo Karawaci.  

2. The tragic downfall story of First REIT just unfolded

I believe that the contract renewal for 5 hospitals with revamped terms is coming out of the oven before mid of 2021 (initially First REIT plan was Dec'20 but I think in view of COVID-19, they may only finalised negotiation 6 mths before the expiry at end of 2021). I believe the terms will be extremely unfavorable. The key changes would be the removal of a pegged exchange rate to SGD. Instead, it will be denominated in IDR whereby First REIT will be exposed to forex fluctation going forward as part of risk sharing. 

3. Worst yet to come

Unfortunately, the worst is yet to come. 

(a) The remaining hospitals tenancy agreements (78% of remaining leases) will most likely follow the same fate as the upcoming renewal terms and conditions of the 5 hospitals. This is because the current commercial charging mechanism with 80% income support of Siloam Hospitals is just not sustainable in the longer term. How should the market priced in this given the different batches of expiry in the medium term to long term?

(b) The deteriorating financial health of Lippo Karawaci is also deeply worrying. There is too much tenant concentration credit risk in Siloam Group and Lippo Karawaci. 

Summary

As long as the new terms and conditions of the next batch of contract renewal due to the expiry of the first 5 hospitals are not released, it is very hard to predict what should be the fair value of a unit of First REIT. Many investors are just making assumptions and thus there is an overhang on its unit price. What are your thoughts on First REIT? Is this the opportunity of a lifetime to accumulate First REIT at S$0.635 per unit? Or will you sell off all your current holdings in First REIT for fear of a drop below S$0.60 per unit?

(P.S: Since June'20, my initial thoughts were to sell off only partial units of my 40,000 units of First REIT in view of the potential default of contractual obligations declared by Lippo Karawaci. However, I have since sold off 100% given my personal disappointment in the behavior of the new Lippo Karawaci CEO for the high handed way he dealt with the announcement without consulting First REIT team in Singapore that caused a major crash in price of First REIT in early June'20.)