*LATEST*
If you are here because of First REIT’s Rights Issue Proposal, Alvin breaks it down in this video. Accurate as of 28 Dec 20:
First REIT is the first healthcare REIT to be listed in Singapore.
It has done very well since IPO, beating both the blue chips as well as majority of the REITs in the past 13 years.
There’re a lot to like about hospital as a business. First, it is a necessity for any modern society to function. Second, an aging population would need it even more. Third, rising healthcare costs means higher revenue for the hospitals. Lastly, healthcare REITs tend to have long lease commitment and tenants basically don’t move out at all.
Hence, it was surprising when I heard the news that First REIT tanked 11% prior to its trading halt.
The drop was attributed to a press release by PT Lippo Karawaci (IDX:LPKR). It said that Lippo Karawaci was to start discussions to restructure its leases with First REIT as the rents were unsustainable given that some of the hospital revenues were down 40 to 50 percent due to Covid-19.
The market didn’t like this piece of news and First REIT was down by 21% at the end of the trading day on 1 Jun 2020.
You might be scratching your head since healthcare is supposed to be non-cyclical and should see even better business during Covid-19.
I have such misconception at first until I learned that general practitioner and dental clinics in Singapore have suffered as much as 50 percent revenue decline too. This is probably due to the effect of Circuit Breaker whereby many workers have to work from home and there’s no requirement to get sick leave from doctors to skip work. Dental clinics are not taking patients for normal checkups.
I would also believe that non-urgent check-ups and surgeries would be postponed in the hospitals. Patients would rather stay away from hospitals due to the risk of Covid-19 infection. This could result in the drastic drop in patient traffic and revenue to the hospitals.
An Alarming Sign
But what I couldn’t understand was this one sentence in the subsequent announcement by First REIT in response to the huge price drop,
The Manager has not been approached by LPKR (Lippo Karawaci) in respect of the matters mentioned in the Press Release.
This is a piece of major news and why wouldn’t Lippo Karawaci discuss with First REIT before making this press release?
It is extremely weird considering that the owners of these companies are all related.
Lippo Karawaci and First REIT are both partly owned by the Riady family.
Hence, why would they want to shock their own family members. Given that this is a big announcement, you don’t need a genius to know there would be a huge impact to First REIT once the news is out. You would better check with your counterpart or your family member that this is going to happen. Both First REIT and Lippo Karawaci should publish the press release together.
The one-sided press release made First REIT looked very bad – they don’t know what’s going on and got blindsided by its tenants.
This is simply bad PR.
A Little History
Let’s dig a little further into their history.
Lippo Karawaci has been in financial trouble in the last few years and was heavily indebted. To make things worse, they had their credit rating downgraded to junk status. They had to raise money via a rights issue. Several Lippo Group subsidiaries were also investigated for corruption. Mochtar Riady’s grandson, John Riady, was put in charge as the CEO of Lippo Karawaci at a young age of 33 to turn around the Indonesian empire. He is the son of James Riady. But there’s another part of Lippo empire in Singapore and beyond, which was run by Stephen Riady.
It has been obvious that Mochtar Riady has his succession plans laid out and the assets delineated between two sons.
I have groomed my second son, James, and third son, Stephen, to take over Lippo Group. James is in charge of the group’s businesses in Indonesia, while Stephen manages its overseas operations, including those in China, from Singapore.
Selling away assets to raise cash was what John Riady did. Bowsprit is the manager for First REIT. Lippo Karawaci used to owned Bowsprit but have since sold it to OUE (SGX:LJ3) and OUE Lippo Healthcare (SGX:5WA) for S$99m in 2018.
In the same period, OUE Lippo Healthcare acquired about 11% stake in First REIT from Lippo Karawaci for S$103 million.
In turn, OUE have a 64.35% of OUE Lippo Healthcare.
OUE is 68.69% owned by the Riady family and is helmed by Stephen Riady.
Yes, it is a complicated web of ownership.
But they are definitely all related.
Is there a bigger problem than just a Covid-19 induced revenue decline in the hospitals?
Are there some lines being drawn among the family members because of how the assets were separated, such that First REIT does not know that Lippo Karawaci was planning to negotiate the rents down?
Mochtar Riady said this in his story,
I have seen some Chinese family-run businesses weakened by feuds over succession. Avoiding such damaging quarrels requires good communication among family members. To strengthen our own family ties, we make annual trips involving many of the children and grandchildren.
I hope that Mochtar Riady has been successful in uniting the family and hence his business empire. I can’t help to suspect the possibility of a family feud as the announcements seemed so uncoordinated. If not, their communications and operations need to tighten up a lot more. No one likes to be blindsided, be it the landlord or the unit holders.
With John Riady’s Hospitals being a separate entity from Stephen Riady’s REIT, it becomes natural that a rightful commercial decision by made by John Riady and his team to reconsider the right amount of rental support it should provide to the Landlord, in this case being Bowsprit (old name). Bowsprit has since been renamed to First REIT Management Limited. In the earlier days, John Riady was in effect ‘paying rental to himself’ when it was owing a large proportion of First REIT. He was effectively controlling the REIT Manager too then, which entitled him to the fees paid out.
Today, he is no more enjoying anymore of the above financial benefits.
Siblings are competitive towards each other too.
Moving forward, we should treat John Riady and the Siloam Hospitals as a normal Tenant, just like how a Retail REIT treats her tenants.
The good news here is Hospital premises are more ‘sticky’ to the tenant compared to a Retail premise.
A bad case scenario in a rental environment would be the tenant moving out. But will all Siloam hospital-operators move out from their respective premises ? It is hard enough to move out if we are talking about just one hospital, so about 14 hospitals ?
To make a long story short, everything in future depends on how much dpu is Stephen Riady willing to accept for the premises. And we, as unitholders, will have to accept this dpu too. I am willing to take back 50% of 8.6c for this risk I am bearing. I have been invested since 2006.
Thank you for your good write-up in the above.
CK
If DPU is cutting to 4c, the price gonna tank again another 20-30%. Historically, FR always trades at 8% yield. Prove will adjust to the new DPU going forward. With the risks, expect to go up 10%… Your holdings is already free, will you continue to hold on to it or seek better / stable investments?
Thank you, WK,.. if you look back at FR’s history,.. I believed when times were better, its yield was very low, at 4% -5%. I must say I remembered this very distinctly because I used to advocate FR to friends, and one of them told me the yield is too low for her liking. It was just recently,… when the price plunged to $1.00 pre-Covid that the yield was 8%, and this was because the dpu kept standing at 8.6c. Actually,.. I’m not too sure what sort of yield will the mkt demand from FR if the dpu shld tank to 4c. This yield demand will the decide how far will the price drop from here,… or perhaps,.. even rise from here IF the mkt deems this 4c dpu as being SAFE and resilient.
For myself,.. well bro,.. since we are still in the midst of a crash and a sure recession, with still room to generate returns elsewhere, I’ll deploy my bullets somewhere else. To me, this pandemic is a one-in-a-lifetime opportunity.
For me, selling now will be too late. I presumed u will continue to hold on to it since it’s a freehold. I hope the CEO can negotiate a fair renewals with his tenants n not sacrifice us shareholders…
I am hoping for the same too,… Thank you for the good exchange,…
CK