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Sold First REIT to raise funds.

Friday, November 2, 2018

The plan was to blog about this together with my quarterly passive income report (4Q 2018) but I decided to take some time off from Neverwinter to do this earlier.

I have been invested in First REIT since before the Global Financial Crisis and, increasing my investment during the crisis and Mr. Market's bouts of depression, it became a rather significant investment in my portfolio.

First REIT has been an amply rewarding investment for income as I did nothing but received income distributions in the following 10 years and more, enjoying yield very much in excess of 10% per year.

As an investment for income, First REIT's performance has been stellar.

Why then did I decide to sell my investment in the REIT?

I said in my last blog on First REIT that if we feel that the REIT's income stream is in peril or if we are not ready for rights issues, we should not invest in the REIT.

The concern that LPKR (which accounts for more than 80% of the REIT's income) might default is a reasonable one as they are struggling with a weak Rupiah.

Although I do not feel that there is any risk of an imminent default and LPKR has also announced plans to improve its financial health which includes sale of assets, realistically, LPKR must negotiate to pay a lower rent to First REIT as long as the Rupiah remains weak.

Naturally, everything else remaining equal, when this happens, it should translate to a lower DPU.

Don't ask me when it might happen or how much the reduction might be but investors should be prepared for the eventuality.

As for rights issues, investors in First REIT should be prepared too because OUE's strategy is to go asset light and OUE Lippo Healthcare's relatively big portfolio of assets in Malaysia, China and Japan will eventually be sold to First REIT.

Although First REIT's current gearing level is relatively healthy and it will be able to take on more debt for acquisitions, it will still need to do some equity fund raising which means either private placements or rights issues.

Yes, in the plural.

In my last blog on First REIT, I said I was not adding to my investment in the REIT but I was quite happy to hold on to my investment.

My investment in First REIT has been free of cost for quite a while now and a lower DPU does not really worry me.

I am always ready for rights issues and the prospect of a rights issue or a few does not worry me either.

However, recently, Mr. Market made me too many tempting offers in the non-REITs space and unwilling to dig deeper into my war chest, I decided to sell my investment in First REIT to raise funds instead.

Why not reduce my investment in AIMS AMP Capital Industrial REIT which is quite a bit larger than my investment in First REIT?

Well, if I must choose, I would always choose to sell what I feel is a more uncertain investment and First REIT's future income seems less certain compared to AIMS AMP Capital Industrial REIT's.

What have I been buying recently?


Back to Neverwinter for me now.

Related post:
Why First REIT and why worry?


AK71 said...

Wong Yao Keng says...
Others take time off from work to do something. AK took time off games to blog 🤣

AK says...
It is a big sacrifice :p

laurence said...

Eeeeekssssss...... run for our lives !!!!!
(panic sells away First Reit at any price)

;) :)

Jimmy L said...

just wondering, ocbc at this current price is around 3%+ only. is it wise ?

AK71 said...

Hi Laurence and Jimmy,

Everyone should do their own due diligence and decide for themselves. ;)

G said...

Hi AK, seems like reits have been showing weakness in their prices (FTSE Reits Index has been going down). I have just added Ascendas Reit and MLT Reit recently in October ($20k), no too sure if I should continue to hold them, cut or add to average down. Would you be adding on anymore reits given the future outlook, especially with the increasing interest rate hikes and trade war concerns outlook?

AK71 said...

Hi G,

I remind myself that all investments are good at the right price.

If you refer to my past blogs on S-REITs, you will get an idea of what I mean. :)

haven11 said...

I returned to read a little... :)
Jimmy L --> I am not sure if I saw suggestions to OCBC, I may have seen a kid keeping money in a piggy bank... patiently waiting...

laurence said...

Wah, First Reit fell off the cliff today.
Did AK activate the bulldozer to scoop up cheap shares? ;)

AK71 said...

Hi Laurence,

I have not looked at First REIT for a while.

Mr. Market is probably more aware of the issues First REIT faces now.

redponza said...

Hi AK,
I believe with the recent share price fall. First REIT is more attractively priced to reflect its risk

AK71 said...

Hi redponza,

If you are able to quantify the risk in dollar terms, then, you would be able to determine a fair price to pay for First REIT.

Whether First REIT is attractively priced now should not only depend on what you believe but also on what you know for sure.

blazingruby60 said...

hi AK
would you consider picking up First Reit again since the share price has been hammered not once but a few times already. ?
ascendas hospitality reit - you have bought this share long time ago, would you pick up some at current price 0.925? thanks n cheers

AK71 said...

Hi Ruby,

The underlying issue has not been resolved for First REIT.

You might want to read my blog on why I sold First REIT again to understand the issue at hand.

Of course, all investments are good at the right price and for First REIT, I believe that the right price is a lot lower

Don't ask me what that price is.

Same for AHT.

Don't ask me at what price would I buy. ;)

AK71 said...

First Real Estate Investment Trust (First Reit) fell after its former parent company Lippo Karawaci announced it will start discussions to restructure its leases as the Covid-19 pandemic renders its rental subsidies to the Reit "unsustainable".

Units of First Reit dropped 11.3 per cent or 10 Singapore cents to 78.5 cents as at 11.46am on Monday before it called for a trading halt. About 6.6 million units changed hands.

This marks the lowest price for the counter in nearly two months. First Reit units traded at 74.5 cents on April 9.


AK71 said...

"The distribution per unit (DPU) of First Reit fell 53 per cent to 1.01 Singapore cent for the third fiscal quarter ended September, compared to 2.15 cents a year ago.

"The latest quarterly distribution will be paid out to unitholders on Dec 23, after the Reit's book closure on Nov 19.

"Units in First Reit closed at S$0.44 on Tuesday, up two cents or 4.8 per cent, prior to the announcement of the results."

The Business Times, 10 Nov 20.

AK71 said...

"First Real Estate Investment Trust (First Reit) will restructure the master lease agreements of its 11 Indonesian hospital assets leased to former parent company Lippo Karawaci (LPKR).

"The aggregate commencement base rent starting Jan 1, 2021, will be approximately 550.7 billion rupiah (S$50.9 million) per annum.

"The commencement base rent will have a fixed escalation rate of 4.5 per cent per annum, versus a base rent escalation capped at 2 per cent per annum for the existing LPKR master lease agreements.

"The higher escalation rate is intended to compensate for the potential of increased volatility, since rental payment currency will be switched to Indonesian rupiah, from the Singapore dollar."

The Business Times, 29 Nov 20.

AK71 said...

First REIT has proposed to undertake a rights issue as the healthcare REIT faces a “significant refinancing hurdle” related to its short- and long-term financial obligations.

The REIT has about 80.2% or about $395.7 million of debt due within the next 18 months.

About 40% or $196.6 million is due on March 1, 2021.

First REIT intends to issue 791.1 million units at an indicative price of 20 cents apiece to raise about $158.2 million in gross proceeds.

This will be issued on a renounceable basis to eligible unitholders and on a pro rata basis of 98 rights units for every 100 existing units held.

The EDGE, 28 Dec 20.

MON said...

Hi AK, I would like to get your advice. I bought this share some time back at a very high price of 1.3x. As I was busy, I did not look at shares until recently and was shocked to note that this share has dropped to about 0.2x. Now I am a bit lost as they are proposing a rights issue. Can you advise if I should cut loss or just put this share on Cold Storage?

AK71 said...


I am sorry to hear of your loss.

As for what to do now, ask yourself if you did not buy at $1.30 a unit, would you buy at $0.20 a unit now?

Peter Lynch said before that all investments are good at the right price.

In short, if you feel that you would be a buyer at $0.20 a share, you wouldn't want to sell what you have now.

You have the answer, not me.

When to BUY, HOLD or SELL?

AK71 said...

First REIT will be making its maiden entry into the Japan nursing home market through the acquisition of 12 nursing homes at a purchase price of JPY24.2 billion ($291 million).

The 12 freehold assets have a combined gross floor area of approximately 90,989 sq m and 1,451 rooms, which are 100% master-leased to tenants who are independent local nursing home operators.

The assets are being acquired from the REIT’s sponsor, OUE Lippo Healthcare. First REIT will acquire OUELH Japan Medical Facilities (JMF), which owns 100% interest in the nursing homes.

Approximately 78.3% of the purchase consideration or $131.5 million will be funded by the issuance of approximately 431 million new First REIT units at a 9.3% premium to First REIT’s three-month volume weighted average price of 27.9 cents.


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