Summary of First REIT 2019 AGM

  • First REIT only did a Rights Issue ONCE in 2010. It was a 5 for 4 rights ratio (BIG RIGHT ISSUE) to fund 2 major assets from the sponsor: Mochtar Riady Comprehensive Cancer Centre & Siloam Hospitals Lippo Cikarang (SHLC)
  • A small private placement was done in 2012
  • Did perpetual security of around $60 million (not a big amount) 3 years ago
  • From the above 3 points, we can be assured that First REIT has been rather conservative in equity financing
  • Risk of Refinancing for the $110 million due in 2019 has been cleared. $10 million has been pared down and First REIT has gotten a bank approval to secure a term loan for the remaining $100 million
  • Hospital in South Korea is a very small asset to First REIT’s overall portfolio. Contribution to the bottom line is < 1%
  • Imperial Aryaduta Hotel & Country Club is heavily under-utilized. Land area is 54,000 sq metres but gross floor area is only 17,400 sq metres. This hotel & country club sits across diagonally from Siloam hospital Lippo Village, their flagship property, and it might be POSSIBLE to build an extension connecting these 2 properties. Potential to do Asset Enhancement Initiatives (AEI) also
  • Valuations of rental value within the same location is about $300k to $500k Rupiah. Rental per sqm charged to a tenant is also within this range. Rental charged to Lippo Karawaci is aligned with market rate and there is room for negotiations going forward
  • Management’s strategic focus in 2019 is to streamline and rebalance asset portfolio (focus more on core assets such as hospital and divest non-core assets such as hotels & country clubs)
  • If strategic value can’t be unlocked from Imperial Aryaduta Hotel & Country Club, it is likely to be the first property to be DIVESTED at the right price and right timing. Hospital in South Korea is also one of their top lists to be DIVESTED when an opportunity arises
  • There are many hospitals within their portfolio that have a shopping mall or hotel RIGHT BESIDE their hospital. This is because First REIT has to buy the whole package and they come together in one title
  • BUT they are currently looking for ways to strata tilted it so that these individual non-core components such as malls or hotels that are beside the hospitals can be divested
  • 82% of rental income comes from Lippo Karawaci. The reason for the current structure of LK sub-leasing to Siloam is because the latter used to be a division under LK. It was only in Sep 2013 that LK spin-off Siloam to be a separate company. Somehow, the arrangement continues to be at LK level, meaning that Siloam has to pay LK for rentals before LK pays First REIT rental income
  • However, First REIT lease obligation is with LK. LK has to pay First REIT rent directly and if LK chooses to sponsor Siloam, that’s a separate issue between them
  • LK faces debt repayment issues and that has affected the timeliness of their payment to First REIT. They used to pay 3 months in advance but in 2018, they pay us just IN TIME. Over the last few quarters, LK is catching up with rental payments. Nevertheless, LK has NEVER come to First REIT to renegotiate the lease, default on payment and they continue to honour their lease obligations
  • The all-in cost of debt is a little high, slightly below 4%. It’s hard to lower the rates because ultimately banks would still factor in the country risk premium in Indonesia into their interest rates
  • Valuation of their Indonesia properties is being valued downwards due to a higher discount rate. The discount rate is based on a lot of factors such as political and market conditions
  • Most shareholders are concerned about the lease expiry in 2021. Management has no clear answer on this. It is still 2 years away but all stakeholders would work out a win-win situation for everyone
  • First REIT owns the land, Siloam owns the equipment and facilities. Siloam has invested a lot of capital and resources and it is very unlikely that they would shift out. Hospitals are doing very well and occupancy rates are high. Financials of Siloam hospitals are robust
  • A possibility that LK might re-negotiate to pay First REIT in Rupiah. But if that happens to be the case, then our incremental rental income would be higher as it will be pegged to Rupiah’s CPI, which is a lot higher than Singapore’s CPI of 2%
  • Jokowi implemented universal healthcare insurance that allows every Indonesian to latch on this scheme for basic medical services. There is a lot of demand coming from 2nd to 3rd tier cities and Siloam wants to make sure entire Indonesia has access to basic health care facilities
  • LK is undergoing a restructuring process in its leadership structure as well as debt refinancing. However, LK is NOT in a net debt position as there is $5 billion worth of assets in comparison to $1 billion debt. Furthermore in 2019, another $1 billion is injected from rights issue from the Riady family and sale of the mall to Lippo Retail mall trust
  • LK’s bond yield has stabilised from 17% to 7% and the price has gone up from $0.70 to $1. Management is confident of LK’s liquidity position
  • Lastly, what I like MOST about First REIT is Mr Victor Tan’s (CEO) background. He is a chartered accountant, fellow member of ACCA and was previously the financial controller in Parkway Holdings Limited. I believe a CEO who has a strong accounting background tends to have a sharper financial and business acumen in stewarding the company

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