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Dark chapter for high-flying First REIT

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Is this the best window of opportunity to enter First REIT? The unit price of the health-care service provider had taken a severe knock after crashing 16% from 15 to 20 November 2018. Such devastating decline is unheard of among S-REITs and perhaps, illustrated a strange dark chapter for First REIT.

For sure, First REIT is widely regarded as one of the most established S-REITs and possesses a proven track record of solid distributions. First REIT was listed on the SGX mainboard on 11 December 2006. Since IPO, the unit price of First REIT had experienced an explosive bull run, surging from an IPO price of $0.53 to a peak of $1.47 in 2015.

First REIT

Even with the recent correction, long-term investors should be laughing all the way to the bank because of the mighty unit price appreciation and the long history of distributions paid out.

Notwithstanding the above, many investors should be having difficulty sleeping well at night as unfolding events threaten to derail the growth prospects for First REIT. Out of nowhere, First REIT unit price suffered an unexpected train wreck. Should investors start running for their lives? Or should investors stay put and hope for a windfall from a potential fire sale by major shareholder, Lippo Karawaci?

Lurking troubles for First REIT?

The retreat of First REIT unit price was largely attributed to the Fitch Ratings Ltd’s downgrade of the credit rating of its sponsor, the Lippo Karawaci which had been under investigation by the Indonesian authorities for bribery. In addition, First REIT derives a substantial amount of rental income from Lippo Karawaci. Thus, if Lippo Karawaci do face cash flow issue, the impact to First REIT cannot be underestimated.

Source: First REIT 2017 annual report

Given the opportunities for bargain hunting, I have been asking myself whether it is worth the risk to invest in this counter. At Price/Book Value of 0.941 and dividend yield of 8.43%, First REIT unit price is currently at a very tempting level. Nonetheless, I think it is important to pen down my thoughts to assess the risks and to provide the clarity of thoughts.

Firstly, it is unusual for an S-REIT to be reliant on one big tenant. Most of the S-REITs have diversified customer bases to ensure that the departure of the key tenants would not cause a significant dent to the rental income. While the bribery investigation had been the focus point, my view is that this storm is likely to blow over and is unlikely to result in an epic collapse of the Riady’s business empire.

My concern is actually [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]

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Updated: December 2, 2018 — 12:16 am

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