First REIT’s announcement on Dec 28, of a 98-for-100 rights issue at 20 cents a unit, to raise $158 million came hot on the heels of a Dec 24 announcement of what appeared to be a successful refinancing by Oversea-Chinese Banking Corp and CIMB Bank for $260 million. The Dec 24 announcement says “First REIT has entered into a facility agreement with [OCBC] and CIMB Bank, Singapore Branch in respect of a term loan facility of $178.5 million and a revolving credit facility of $42.5 million, with an accordion option for a $39.0 million increase in commitments”.

The loan is subject to certain covenants. “A mandatory prepayment event is triggered if, except with the prior written consent of all the Lenders, the Manager ceases to be manager of First REIT or First REIT’s properties and other assets or any part thereof. An event of default is triggered if OUE Lippo Healthcare ceases to own at least 8% of all the Units; OUE ceases to own at least 10% of all the Units; or OUE ceases to own at least 40% of the Manager,” the Dec 24 announcement states.

The Dec 24 announcement makes no mention of a rights issue. Yet in note 2.2 of the Dec 28 announcement, First REIT’s manager says the refinancing is conditional on an equity fund raising.  “The maximum amount of $260 million under the Refinancing Facility is lower than the amount of $400 million under the 2018 Secured Loan Facilities because of the lenders’ concerns over the uncertainty relating to the valuations and cash flows of First REIT’s assets and the potential negative impact of any master lease restructuring. It is a condition of the Refinancing Facility that First REIT undertakes an equity fund raising exercise to repay the difference between $400 million and $260 million, being S$140 million,” the Dec 28 announcement says.

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“When we made the Lippo Karawaci master lease agreement restructure, we said the banks would refinance $260 million but we have to raise $140 million,” says Victor Tan, CEO of First REIT’s manager.  

“The lenders … require First REIT to repay the difference between $400 million and $260 million, being $140 million. The Manager is currently considering how the S$140 million should be financed and will announce details in due course once they become available,” a Nov 29 announcement said.

The fund raising is a matter of urgency, says a Bank of America banker who is advising First REIT’s manager. The refinancing exercise is to avoid an imminent default of $196.6 million repayment obligation which matures on Mar 1, 2021.

Valuations of REIT assets are dependent on rents. Often, net property income (NPI) is capitalised for a valuation, or a discounted cash flow exercise is carried out to obtain a net present value for the asset. Hence when rents fall, valuations are often likely to fall.

When First REIT first listed, assets were sold into the REIT at what now appears to be inflated prices. In addition, rents were paid in Singapore dollars. The lease period for the initial 15 assets was 15 years. In that period, the Indonesian rupiah has fallen by 48% according to various announcements made by First REIT’s manager and Lippo Karawaci.

Lippo Karawaci is proposing to lower the master lease rents such that FY2019’s rents of $115.3 million would fall to $77.5 million on a pro forma basis, translating into NPI of $75 million compared to $112.9 million in FY2019. As a result of the decline, DPU before the rights issue would fall from 8.6 cents in FY2019 to 4.44 cents on a pro forma basis. If the rights issue units are included, DPU falls to 2.59 cents on a pro forma basis. NAV as at Dec 31, 2019 of 99.64 cents would fall to 51.75 cents on a pro forma basis before the rights issue. If rights units are taken into account, NAV would be 35.95 cents. Lippo Karawaci itself completed a rights issue in July 2019, raising some US$787 million. The Lippo group are shareholders of OUE and OUE Lippo Healthcare which own First REIT's manager and some 19.72% of units in First REIT.

SEE: First REIT proposes rights issue of $158.2 mil as debt repayment looms

“OUE as well as OUE Lippo Healthcare have provided irrevocable undertakings to take up their pro rata units and excess rights,” Tan says.

Unitholders get to vote on two resolutions on Jan 19, on the new master lease agreements, and on a whitewash waiver. OUE and OUE Lippo Healthcare will be abstaining.

The choice for unitholders is stark, a Hobson’s Choice so to speak. If they don’t vote for the resolutions, the rights issue cannot proceed, and the REIT may face a financing default. If they vote for the resolutions, they will get terribly diluted in both DPU and NAV, but the REIT lives to fight another day.  

No surprise then that on Monday Dec 28, First REIT’s unit price fell 34% to 26 cents. 

Investors may want to rethink their REIT investment philosophy and stick with blue chip names which have responsible sponsors, whose interests are aligned with unitholders.