Revisiting First Reit: There Is Still Fear

PT Lippo Karawaci Tbk has 5.2 Trillion Rupiah or $500 million SGD in cash left after their issued rights, last reported 9 month to 2019. 

How about Siloam Hospital? Net profit has jumped back up with 50% increase in operating cash flow (OCF) to $357 Billion Rupiah. Capex is at 4 year low with low debt. Things is looking good. However cash flow use for investing is more than OCF.

First Reit revenue from Siloam Hospital is 82.2% which is $95.5 million SGD or $985 billion rupiah. It was said that Karawaci is paying for Siloam's rental, total $698 billion rupiah. Karawaci can easily paid up. That mean Silaom have to cough out $287 billion rupiah.

Siloam operating expenses jumped from $1354 billion to $1630 billion rupiah in FY 2018, probably due to rupiah depreciation effect as well. For 9 month 2019, the expense increase more than 15%. No rental info can be found. $287 billion rupiah is less than 20% of the expenses.

Kawawaci paid $510+32 (One property added in FY2019) billion rupiah for 9 month 2019 for Siloam's rental. There was 1 more property added. Signs that the sponsor won't throw the rental to Siloam, they have the cash anyway.

In my opinion, I think the lease renewal will remain status quo.
1. It is disadvantage to cause another up roar by drastically reduce the rental.
2. If I want to make a drastic change, I would opt to do in 5 years later for 44% of the portfolio rather than now for 22%.
3. The affected properties rental stands for $170 billion rupiah or $16.5 million SGD. lets half this rental revenue and that is a lost of $8.25 million SGD. That is 1 cents drop in DPU in terms of SGD.
4. Let's say they throw it to Siloam to pay up, $170 billion Rupiah won't be a big impact on Siloam.

Conclusion

Market is in fear for small impact. At least for the next 5 years.Of course there is also the concern of asset injection via rights.

Reference:
Karawaci
https://www.lippokarawaci.co.id/investor-center/financial-statements
Siloam
https://www.siloamhospitals.com/Contents/Investor-Relations/Publication/Annual-Reports

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Declining Rupiah Eating Into Lippo Karawaci Healthcare and How It Will Affect First Reit

Investors should know by now that the conglomerate Lippo Karawaci (Lippo) are facing cash flow issue, bring uncertainty to their Reits, hence their ability to pay rent to First Reit. Paying the rent in SGD made things worst as Rupiah deprecates against SGD. 

Lippo mall price had crashed in terms of its yield affected by the falling Rupiah. First Reit's yield isn't affected but sentiment is bad and hence has fell below NAV. Base on Stockcafe stats, First Reit is the number one shares that stockcafe users are buying. Although cheap I am wary to jump into the reit as Master lease will expire in DEC 2021.

Lippo Karawaci Healthcare

As Rental fees are not recorded separately, I will have to make do with General & Administration Expenses(GAE). If you have not already notice, the GAE is growing much faster than the top line can climb. And we shall see how the bottom is like.

Net Profit CAGR is -14.46%, forming newer low in 2018. I believe this is due to the fall of Rupiah and Lippo has to paid rent in SGD.

How Net Profit Reacted to Weaken Rupiah

The weaken Rupiah has devastated the profitability of Lippo's Healthcare segment.To mitigate the fallen profit, Lippo can

• Build more hospitals for growth
• Increase Hospital fees
• Pay rental in rupiah instead of SGD to First Reit

Master Lease Expiry

The deprecation of Rupiah is relentless over the long term. I believe it will be of Lippo interest to change the payment of some sort if not of Rupiah. First Reit current yield is 8.7%.

Worst Case Scenario

Assuming Lippo wants to stop paying in SGD, affected income will be affected by 22% base on GFA in the next 3 years.

As for how much lower is will the income be affected? Rupiah has depreciate 37% since 2010, if it was to be adjust accordingly, income for First Reit will likely drop 37%. It could be a lower drop depending on how it is structured.

A 37% drop would mean a drop of  3.2% in yield, (8.7%-3.2% = 5.4%). But only 22% of GFA will be affected so the yield will drop 0.7% instead when the first lease expired in 2021. This mean if price and income of First Reit is to remain constant, yield will drop from 8.7% to 8%

Conclusion
What I have done here is speculation of a possible and the worst that could happened. Lippo may decide to carry on to pay in SGD. If one is to invest in First Reit now, I think the risk reward is good. Taking 8.7% yield for 2.75 years and a possible drop to 7.3% for another 4 years till the next round of expiry.

Lippo although with cash flow issue, with their assets, there is a low chance of default or bankruptcy. However that will affect First Reit share price if things deteriorate.   

I think it is worthwhile to collect the dividends and wait for the plans for the mater lease to be updated in 2021.  Rights issue may happen for future acquisitions, which may or may not be a good things, as long not like OUECT. 

Honestly, to save Lippo Healthcare bottom line, the rent fees in SGD is highly likely to stop.

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