First REIT update – Would I subscribe for the Rights Issue?

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After our last article on First REIT, I received a lot of comments asking for a deep dive into Lippo Karawaci, and for my thoughts on the rights issue.

The rights issue closes after CNY, so I figured I would share some thoughts.

What’s happened since our last article

Updated timeline for First REIT below:

June 2020

Lippo Karawaci Tbk (a major tenant of First REIT), said that due to the COVID-19 pandemic in Indonesia and its “material negative impact” on business, it would be restructuring its leases with First REIT

20 July

First REIT issues a profit guidance, warning that DPU will drop 40 – 50%.

11 August

SGX queries first REIT on the accuracy of their property valuations. The response, among others, was that “The Board of Directors are of the view that there is no material change to the carrying amounts of First REIT’s investment properties for 1H2020 necessary at this stage”

29 November

First REIT announces a drastic restructuring of the master lease agreements with Lippo Karawaci. Rentals will drop significantly under the new leases. Share price drops 20%.

28 December

First REIT announces a massively dilutive rights issue at 98 rights units for 100 units (at $0.2 per unit)

They also dropped a bombshell that the refinancing exercise is to avoid an imminent default of $196.6 million repayment obligation which matures on Mar 1, 2021.

Share price drops 40%+ over the next few days.

19 Jan 2021 *NEW*

At the EGM, unitholders approve the restructuring and rights issue overwhelmingly:

This is the list of shareholders (Lippo group cannot vote as they are conflicited), so you know who to thank for the results.

27 Jan 2021 *NEW*

Launch of Rights Issue – 98 rights units for every 100 existing units.

Issue price of $0.20 per unit

As at Friday 5 Feb, First REIT trades at $0.21, so if you sell your rights entitlement at $0.21 it’s only a $0.01 gain per share.

Unitholders have until 16 Feb (after CNY) to decide whether to accept the rights entitlement.

Update on Deep Dive into Lippo Karawaci

A lot of you have asked for the deep dive into Lippo Karawaci, so I wanted to update on progress as well.

Long story short – there is insufficient information available publicly, to do a comprehensive deep dive into Lippo Karawaci.

I’ve gone through the financial statements, annual reports, online searches etc, but as we’ve seen from the First REIT saga, there’s only so much you can learn from the public info.

The valuations / book value can stay at pre-COVID levels long periods, until the day they suddenly change.

With a market like Indonesia, the information in the public domain is only useful to a certain extent.

It requires knowledge on the ground, talking to insiders, talking to people in the industry, understanding the behind the scenes positioning etc, to really reach a conclusion on Lippo Karawaci.

Tldr – Lippo Karawaci is a lot like Sincere Property Group that we covered in yesterday’s CDL article. A bit of a black box.

Lots of uncertainty here.

As an investor, the options are:

  • Find a way to get comfortable with this uncertainty (eg. position sizing with stop loss)
  • Find a way to get more information (eg. talk to insiders on the ground)
  • Don’t invest

It’s really as simple as that. If you’re not comfortable with the risk, you either find a way to get more information, or you walk away.

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Would I subscribe for the Rights Issue?

Full disclosure – I am not vested in First REIT. I have no skin in the game here, so take all my comments with a pinch of salt. This is NOT financial advice.

Now there are 2 big questions here:

  1. Whether to hold/sell First REIT short term
  2. Whether to hold/sell First REIT long term

Hypothetically – if I were vested in First REIT and sat through the decline from $1 to $0.21, what would I do?

Apart from reexamining my investment process and risk controls of course.

Short term

If I were, I think I might just take up the rights, and hope that the price recovers in the next few weeks/months.

And then I make my decision on whether to hold/dump it longer term.

Historically, I’ve noticed that when REITs do a big dilutive capital raise, the worst time to sell is usually when the rights entitlement start trading (ie. 1st Feb – 9 Feb). Of course, that also makes it the best time to buy the REIT, if you’re looking to build a long position.

But historically – the rights entitlement trading is when most unitholders start dumping their rights entitlement, and the large supply tanks the price. It’s usually best to avoid selling during this period.

But whether this applies to First REIT – tough to say.

We don’t know what we don’t know here, and impossible to say what is going to happen the next few months. Maybe the COVID in Indo gets worse. Maybe Lippo Karawaci’s financials continue to deteriorate.

Many things can happen that would affect the share price in the coming months. That’s a risk I have to be comfortable with if I buy in now.

Long Term

Long term, whether First REIT is a good investment is going to depend on how Indonesia handles COVID, how the Indonesian economy and rupiah performs, and how the Lippo group performs.

All of which are very up in the air here.

Many investors are very bullish on emerging markets in 2021 because they see a falling USD, so it’s not like there isn’t any tailwinds in play. With good position sizing and risk controls, current prices could actually see decent returns.

So I don’t think there is a one size fits all here. The answer will vary for each investor, depending on their risk appetite, their position size, and how much they can afford to lose.

For me personally though, I have no position in First REIT, and I don’t have any plans to open a position in the coming 72 hours.


As always, this article is written on 7 Feb 2021 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patron.

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10 COMMENTS

  1. Hi, I don’t see the 50% discount off the current share price. As you’ve stated, it’s only 0.01 cents above the current price which 0.21 cents.
    With more downside to come looking at the charts, existing shareholders are basically “screwed” whether they should buy the rights!

    • Yes you are right, the rights entitlement are not very worth it in the current market (so close to current price!).

      What do you mean by the 50% off?

  2. FH has been consistently avoiding commenting on the reputation of Riady family, which is the single most important factor from my personal perspective, far more valuable than those financial and macro factors.

    • Hi Sam, that’s a really good point, thanks for raising it. If I were to look at it from that perspective, I probably wouldn’t be an investor in the Lippo group. Short term to flip sure, but I wouldn’t be comfortable holding it longer term because of their track record.

      It’s probably one of the big reasons why I don’t touch any of the OUE/Lippo group of REITs, and you’re right this probably needs to be brought up in any future article.

    • Ah I see. That’s the slide from the company’s presentation. It’s compared against the closing price when they first announced the rights issue (when it was still trading at 0.40).

  3. Me too! There are certain ppl in the world that you just don’t wanna do business with, no matter how lucrative the deal looks like. I always study the controlling shareholder or CEO’s track record for private companies before I even start to deep dive into those tactical financial figures, in particular for Asian stocks.

    • Yes I agree with this. The numbers only tell you so much, the management, the owners, and their track record, really really matters too. My bad I should have talked about this more in the original article too.

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