Unitholders question family ties to First Reit

Singapore

DURING a virtual dialogue session between the Securities Investors Association (Singapore), or Sias, and First Reit on Thursday, unitholders raised concerns that "there are some lines being drawn among the family members", such that First Reit did not know that Lippo Karawaci (LK) was planning to negotiate the rents down.

In response to how the "different parts of the family" are working together to "resolve the issue", the board and the management said in a bourse filing on Friday that the decision for LK "to act in the manner that they did was a result of the independent decision of their board and management", noting that while OUE/OUE Lippo Healthcare (OUELH) and LK have common shareholders, "with regard to the way different entities operate, there are separate board and management teams". They added that the real estate investment trust (Reit) continues to "receive very strong support from our sponsor group, who was instrumental in the process of negotiating the refinancing facility for First Reit".

In its response on Friday, First Reit highlighted that while the board and management have been "cognisant of the imminent expiry of certain master lease agreements (MLAs)" and had been in discussions with LK on these since 2019, the unilateral announcement made by LK last June to restructure all the LK MLAs "triggered a sequence of events not within (their) control".

"Stemming from this, the lenders expressed significant concerns over the sustainability of First Reit's capital structure," it said in the response.

Other questions posed by unitholders include OUE's rationale of ensuring that the resolutions are passed before it provides its support; to which First Reit responded: "OUE and lenders will require certainty of valuations and cash flows of First Reit's assets."

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The two resolutions, which unitholders will need to vote on at the Reit's upcoming extraordinary general meeting on Jan 19, include the proposed LK MLA restructuring and the proposed waiver by unitholders other than Clifford Development (CDPL) and its concert parties of their rights to receive a general offer for their units in First Reit from CDPL.

The board and the management of First Reit added that given concerns from its lenders over the sustainability of the Reit's capital structure "without the infusion of additional equity into First Reit post the MLA restructuring", taking additional debt or financial facilities from OUE would "further increase aggregate leverage/gearing" and not address the lenders' main concerns.

First Reit's dialogue session with Sias comes following its announcement last December regarding a dilutive rights issue proposed by the manager.

On Dec 28, 2020, the Reit's manager announced a proposed rights issue to raise gross proceeds of around S$158.2 million, which it said was "critical" for the Reit to meet its debt covenants, and avoid an imminent default of 39.8 per cent of total debt due on March 1.

The manager is proposing to issue around 791.1 million units, representing some 98 per cent of the total units in issue as at Dec 23, 2020. The renounceable rights issue will be on a pro rata basis of 98 rights units for every 100 existing units, at an indicative issue price of 20 Singapore cents per rights units, which unitholders have deemed "a steep discount".

In a presentation last December, First Reit noted that following the Metropolis Propertindo Utama MLA restructuring, proposed LK restructuring and the rights issue, its distribution per unit yield based on the indicative issue price will also stand at 13 per cent.

On how Reits - like that of First Reit - can continue to make high-yield accretive acquisitions, Keith Ong, co-founder of online real estate co-investment platform RealVantage, said that in general, "it's important to go back to fundamentals and identify the reasons for the high trading yield of (a) Reit", such as whether the sector is "facing particular issues", or whether the issue stems from a weak management or underperforming assets in the portfolio, causing valuations to fall.

"All these factors have a bearing on investors' views of the risk involved and consequently, the Reit's share price performance. If the problems can be fixed, the demand for the Reit should come up, making acquisitions easier; even non-accretive assets can be purchased," he added.

DBS analyst Dale Lai noted that Reits can make non-accretive acquisitions “if it is able to justify why the acquisition is necessary, and if its shareholders approve of it”.

Other options for Reits trading at yields that are “too high to make acquisitions accretive”, he added, include acquiring assets that “have a rental guarantee or rental support from the vendor, such that the asset immediately generates earnings that are indicative of its future potential”. Rental guarantee or rental support also increases the initial yield of the asset.

Alternatively, Mr Lai said that a Reit may also consider divesting lower-yielding assets, and recycle the capital to acquire higher-yielding assets.

Chua Su Tye, a Reits analyst at Maybank Kim Eng, agreed, saying that divesting assets can “strengthen (a Reit’s) balance sheet for acquisitions”. He added that those with the debt headroom can also choose to utilise debt or issue perpetual securities, as they are recognised as equity and will not affect leverage ratios.

However, “it is sometimes difficult to time these together,” he noted.