First REIT's sponsor weakening credit profile

[Jonathan]

Replying to #

Hi there,

First REIT’s sponsor Lippo Karawaci has recently been downgraded by credit rating company. A quick look at it’s annual report, it has negative S$400mil operating cash flow. Should investor be worried? with over 80% leases committed to them?

And also a puzzling thing is, it’s market cap is just S$1bil which is same as First REIT, how is it a sponsor to so many S-REIT?

Thank you in advance for sharing your knowledge.

[Research Department]

Replying to #

Hi Jonathan,

Thank you for your question!

You would have seen that we had similarly flagged the recent credit rating downgrades of the Sponsor, Lippo Karawaci (LPKR), in our latest report on First REIT (FIRT) on 19 April 2018.

While we do not cover LPKR or its related entities, healthcare is a segment that LPKR would want to continue having exposure to given the stable recurring income and the recent nationwide rollout of Indonesia’s universal health insurance coverage.

However, LPKR’s cash flow issues remain on our watchlist. Besides the heightened counterparty risk, there could also be a possibility that LPKR would divest the hospital assets at less-than-ideal valuations to FIRT. We are thus keeping a Neutral call on FIRT.

As for your second question, total assets and leverage have to be taken into account when comparing any entities’ market capitalisation. LPKR actually has a much larger total asset base (almost 5x that of First REIT), but market cap (or equity) looked similar to FIRT because LPKR has a much higher leverage. In other words, it is using more debt vs equity to support its asset base. This is also one of the reasons why it is struggling with liquidity and debt/interest repayment issues at the moment.

– Tara Wong, Investment Analyst

[Jonathan]

Replying to #

Hi Tara,

Thank you for the reply!

“possibility that LPKR would divest the hospital assets at less-than-ideal valuations to FIRT”, does this mean selling asset to First REIT at higher price?

Thanks for the sharing on my 2nd question, learned a lot.
LPKR has issue with interest repayment? Cant find any news on this.

[Research Department]

Replying to #

Hi Jonathan,

Yes, that would mean selling the assets to First REIT at higher prices (which also means lower rental yields).

LPKR was recently downgraded by the credit agencies on this issue, where it was mentioned their cash balance has been falling short of their interest servicing needs and short-term debt maturities.

– Tara Wong, Investment Analyst

[Jonathan]

Replying to #

Hi Tara,

Seems like it doesn’t look good  T_T

Thank you so much spending time explaining. Appreciate it.

[Jonathan]

Replying to #

Hi there,

Want to see if there is any update on the concern for Lippo.

With the worsening of Emerging Market situation, Government kept increasing interest rates and Rupiah weakening so much. Do you see Lippo credit situation to get worst and negatively affect First REIT?

[Research Department]

Replying to #

Hi Jonathan,

Thanks for your question!

From what I can see in Lippo Karawaci’s (LPKR) latest results presentation, 90% of their debt (bonds + loans) is USD-denominated and c.USD150mn is due within the next two FYs. Understand that only their bonds – first tranche of which is only due in 2022 – are fully hedged, and even then only against the rupiah rising above Rp 14,000 per dollar.

This – coupled with LPKR’s liquidity issues outlined previously – will continue to be pose a risk to First REIT.

– Tara Wong, Investment Analyst

[Eric]

Replying to #

Hi Tara,

Thanks for the thorough analysis on LPRK Books.
One of the wonderful thing about First Reits is their currency peg.

The contract terms for their hospital are 15+15 or 10+10.

In 3 years time, their first hospital’s contract will be renewing.
Looking at LPRK current situation, how likely they are able to keep the same contract term?

[Author]

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