The unit price of First REIT is up 18% in 10 trading sessions accompanied by a surge in volume taking its price to net asset value (P/NAV) to almost one time. At 32 cents, annualised DPU yield is likely to be 8.1%. Market watchers are looking at First REIT announcing an acquisition soon in either Myanmar, China or Japan.
In January, First REIT restructured its master leases for 14 healthcare assets in Indonesia to be paid in rupiah. The rent will either be the higher of base rent or performance-based rent. Performance-based rent comprises 8% of gross operating revenue. Previously Lippo Karawaci was the master lessee paying rent in Singapore dollars.
First REIT’s new master lease structure takes the pressure off Lippo Karawaci, its former sponsor and master lessee. As a result, Moody’s Investors Service has upgraded Lippo Karawaci’s outlook to positive, from stable on Nov 23. “The rating affirmation with a change in outlook to positive reflects our expectation of an improvement in Lippo Karawaci’s operating cash flow at the holding company level over the next 12–18 months, mainly driven by strong growth in its core marketing sales, the construction completion of its legacy projects and a reduction in rental payments to First REIT,” says Jacintha Poh, a Moody’s senior vice-president.
First REIT’s sponsor is OUE Lippo Healthcare (OUELH) which owns 40% of First REIT’s manager, and 15.44% of First REIT. OUE, which owns some 27.97% of First REIT and 60% of its manager, also holds 64.26% of OUELH. Itochu Corp owns 25.32% of OUELH. Hence the latter’s free float is just 10.32%, which is why OUELH’s chart shows sparse and intermitent market action.
In February, OUELH announced it is also going to restructure. Shareholder loans and accrued interests of $189.6 million were converted to 4% convertible perpetual securities which have no call date. The perps will be converted into ordinary shares at seven cents per share although they are non-redeemable and non-convertiable for 5.5 years from date of issuance.
This restructure led to a one-off, non-cash gain of $109.9 million boosting net profit. This one-off gain relates to the difference between the shareholder loan of $189.6 million and fair value of the perpetual securities of $79.6 million. Shareholders’ equity received a boost as the perps are added to OUELH’s equity base. The perps can be considered equity because OUELH is under no obligation to call the perps, not does it have to pay distributions if it chooses not to.
OUELH has said its three pillars of the strategy comprise forming and strengthening strategic partnerships, developing an asset-light business model and growing its Pan-Asian network. This is where First REIT comes in.
OUELH owns 12 nursing homes in Japan which were valued at $294 million as at June 30. The properties are mortgaged. First REIT would have debt headroom of $192 million if its aggregate leverage is 45%. First REIT maybe challenged to raise its leverage to 50% (giving debt headroom of $314 million) as its interest coverage ratio (ICR) would have to be above 2.5 times. As at June 30, ICR was at 3.8 times so if it plans on acquiring the Japanese properties, it would be sooner rather than later.
Included in OUELH’s other pipeline assets for First REIT is a 40% stake in some Myanmar healthcare assets such as Pan Hlaing Hospital Yangon and Pun Hlaing Hospital Mandalay which First REIT could easily acquire with its debt headroom. These were last carried at $94 million including impairments. The Chinese assets that First REIT could acquire are Prince Bay China Merchants-Lippo General Hospital and Wuxi Lippo Xi Nan Hospital which are part of joint ventures. OUELH also owns land in Wuxi and Kuala Lumpur. In addition, its annual report lists three pages of litigation the company is involved in.
Whatever the case, the rise in First REIT’s unit price could be readying it for an acquisition which could hospitals in Myanmar and China, or nursing homes in Japan.
