SINGAPORE (Jan 21): First Real Estate Investment Trust was the first REIT to announce FY2018 results on Jan 16. Revenue and net property income climbed 4.7% and 4.5% y-o-y to $116.2 million and $114.4 million respectively. Finance costs rose 21% to $21.6 million because of higher interest rates on loans and also for new acquisitions. In 2017, First REIT acquired two properties from its sponsor — Siloam Hospitals Buton and Siloam Hospitals Yog-yakarta. The REIT reported a fair value loss on its properties of $5.3 million for FY2018.

Although distributable income rose 1.4% y-o-y to $67.68 million for FY2018, and full-year distribution per unit was almost unchanged at 8.6 cents (+0.4%), the management fees rose 5.1% to $11.4 million. This was mainly due to the higher net property income and total assets, which affect the fees. At 8.6 cents, yields on First REIT stand at 8.4% compared with ParkwayLife -REIT’s annualised DPU yield of 4.8%.

The stark difference is attributed to ParkwayLife REIT’s lower risk profile and portfolio, which comprises largely hospitals in Singapore and aged care homes in Japan. Both jurisdictions have stable currencies and relatively low risk-free rates compared with Indonesia. First REIT owns 20 properties, including three nursing homes in Singapore and a hospital in South Korea. The rest are Indonesian assets.

Of note in the results announcement is the sharp rise in receivables. For FY2018, receivables rose to $32.4 million, up 25% y-o-y. Receivables for 3QFY2018 more than doubled to $24 million y-o-y from $11.7 million, owing mainly to advance rental receivables from tenants.

“The piling-up of trade receivables is unsurprising, given continued liquidity stresses at Lippo Karawaci,” OCBC Credit Research says in a recent report. First REIT added that on Jan 15, 2019, it received rental payments of $8 million from tenants.

Lippo Karawaci is the major tenant, contributing 82% to rental income as at Decem-ber 2017 and paying rent in Singa-pore dollars. In September 2013, Lippo Karawaci listed its subsidiary Siloam Inter-na-tional Hospitals Indonesia, which is operator of First REIT’s Indonesian hospitals and accounts for 0.43% of rentals. Other major tenants are Metropolis Propertindo Utama, accounting for 12.48%; The Lentor Residence, 1.47%; Pacific Healthcare Nursing Home, 1.01%; Pacific Eldercare and Nursing, 0.98%; and Dr Park Ki Ju, 0.83%.

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Last year, First REIT’s ownership structure was changed, as Lippo Karawaci needed liquidity. It divested its stake in the manager to OUE and OUE Lippo Healthcare, and a further 10% stake to OUELH. As at Dec 30, together, OUE and OUELH held 17.81% of First REIT and Lippo Karawaci retained a 10.60% stake.

Lippo Karawaci’s woes in Indonesia, where it receives most of its revenue, is seen to be spilling over to its listed REITs — First REIT and Lippo Mall Indonesia Retail Trust — in Singapore. The weakness of the rupiah against the US dollar is likely to affect Lippo Karawaci, as 79% of its debt is US dollar-denominated, says Credit Research Institute. The rupiah’s depreciation could further lower Lippo Karawaci’s liquidity, with a high debt burden and fast-burning cash rate, CRI adds.

Last year, Moody’s Ratings Service and Fitch Ratings downgraded Lippo Karawaci to junk status. This may make it more difficult for Lippo Karawaci to refinance its US dollar bonds that mature this year. Lippo Karawaci can continue, however, to divest its properties into First REIT to help alleviate its tight liquidity issues in Indonesia.

Victor Tan, CEO of First REIT’s manager, said in a statement on Jan 16: “With OUE and OUELH on board, First REIT and Bowsprit (First REIT’s manager) are well positioned to tap the growing opportunities in Asia-Pacific to capitalise on the tremendous growth in demand for quality and affordable healthcare. In addition to the right-of-first-refusal to Lippo Karawaci’s pipeline of properties for acquisition in Indonesia, we now also have a right-of-first-refusal from OUELH.”

The statement implies that First REIT is likely to acquire more properties to boost DPU and there is no lack of properties to acquire.

OUELH is in the process of acquiring a hospital in Myanmar, which is likely to be a pipeline property for First REIT. OUELH is also building hospitals in China and owns a portfolio of nursing homes in Japan. Elsewhere, pipeline properties Siloam Hospitals Balikpapan, Siloam Hospitals Bogor and Siloam Hospitals Bangka Belitung have been completed, according to the results presentation. Lippo Karawaci has 34 operational hospitals under the Siloam Hospitals network across Indonesia, with potentially up to 50 operational hospitals by year-end, First REIT says.

“Our roadmap for the next three to five years is to look at asset rebalancing, diversifying our income streams by expanding into other geographical regions, as well as exploring opportunities to unlock the value of our existing assets,” Tan says in a statement.

First REIT was listed in 2006. Lippo Karawaci also agreed to pay rent in Singapore dollars so that First REIT did not have to bear exchange-rate risk. In 2007, First REIT acquired the three Singapore nursing homes. In 2010, after the global financial crisis, it started acquiring properties regularly from its sponsor, Lippo Karawaci. In 2011, First REIT acquired the Korean hospital. Now, market watchers are concerned that Lippo Karawaci may no longer continue to pay rent in Singapore dollars.

First REIT’s DPU yield of more than 8% reflects the higher risk-free rate in Indonesia. Whatever the case, unitholders should be prepared to put more capital into their REIT as it acquires its pipeline.

First REIT offers high yields; unitholders may have to fund growth with robust acquisition pipeline

First REIT offers high yields; unitholders may have to fund growth with robust acquisition pipeline

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