Can First REIT expand beyond Indonesia?
First REIT started with 4 Lippo’s properties with its first IPO in 2006. First REIT’s income source is solely dependent on the Sponsor, as Master Lessee, for rental payments[1]. The previous First REIT CEO Dr. Ronnie Tan had been pursuing portfolio diversification outside Indonesia and Singapore between 2007 and 2008.
Attempts to expand into China did not materialise
In 2007, First REIT diversified geographically by acquiring four Singapore healthcare properties. The First REIT was looking beyond the Singapore and Indonesia market. First REIT has even signed a Conditional Agreement and three Memoranda of Understanding to invest in hospitals located in Shanghai, Wuxi and Nantong [2].
Attempts to increase footprint in Singapore did not materialise
In 2008, the First REIT manager signed a put and call option agreement to purchase a healthcare logistics and distribution centre in Singapore [3]. However, the option was terminated in 2010 due to the impact of the global economic crisis.
The start of an aggressive expansion in Indonesia
In 2008, when the Global Economic Crisis hit, First REIT manager ensured unitholders that First REIT has emerged unscathed with financial room to grow because of sound capital management. The other contributing factor is that Lippo was embarking on an aggressive capital recycling effort to expand its Siloam healthcare footprint in Indonesia. With that, First REIT continued to grow with Lippo’s Indonesia hospital. First REIT portfolio strategy was changed to focus in the Indonesia market with Siloam hospitals in the pipeline. The last hospital asset outside Indonesia was the Sarang Hospital in South Korea in 2011 [4]. First REIT increased from 6 Indonesia properties in 2011 to 16 Indonesia properties in 2017 [5].
Change in First REIT CEO
Dr Ronnie Tan retired as Chief Executive Officer of the Manager on 19 May 2017. Mr Victor Tan took over as the new Chief Executive Officer of the Manager. There are no more hospital assets added into the portfolio from 2018 to 2020, although the new CEO Victor Tan has consistently preached in every annual meetings.
Future Diversification
It is evident that First REIT CEO and Board of Directors (Minny Riady also sits in First REIT board of directors) do not seem to have a good working relationship with Lippo Karawaci. First REIT manager was caught by surprise when Lippo announced their plan to restructure its lease with First REIT unilaterally, and First REIT has to learn about Lippo’s intention through the media [6]. This has left unitholders to question the family ties between the “different parts of the family” [7], as First REIT has been sold to OUE group in 2018 [8]. The OUE group is helmed by Dr. Stephen Riady who handles the family business outside Indonesia, while John Riady who is the son of James Riady handles the Lippo family business in Indonesia. James and Stephen Riady are the 2 sons of Mochtar Riady managing Lippo’s Indonesia business and business outside Indonesia respectively.
Unlike the previous CEO Dr Ronnie Tan’s effort in diversifying the portfolio outside Indonesia as seen in 2007 and 2008, the current First REIT Mr Victor Tan has not reported any such effort in the 2018 annual report, 2019 annual report, and even the latest right issue announcement. When the global economic crisis hit, the previous CEO was able to acquire the sponsor (Lippo) properties every year from 2008 to 2017. First REIT acquisition of new assets came to a halt after the new CEO took over.
In the proposed 2021 First REIT rights issue, it is disappointing to learn that acquisition of First REIT new sponsor’s (OUE) properties is not part of the rights issue deal. I am not sure of the reason why OUE is not committing its asset into First REIT as part of the rights issue. An accretive acquisition with properties outside Indonesia will instill confidence to the investors. It will also signal First REIT ability to expand beyond Indonesia with the new sponsor. By acquiring OUE asset, it also signals to the investors that OUE interest is unquestionably aligned with First REIT. In my personal opinion, I am not confident in First REIT portfolio geographical diversification without a concrete timeline with OUE asset acquisition. The First REIT manager may not have the capability to expand and diversify its portfolio in the current pandemic environment on its own.
Disclaimer: I own First REIT shares when this article is published on 10 Jan 2021. I am not a financial advisor. I try my best to be accurate, but I may be wrong. This article is just my personal opinion and sharing it for entertainment purposes. [S-REIT; First REIT; SGX: AW9U]
