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First REIT Update - Should You Subscribe to the Rights Issue?

CEO Khai Intela
After our previous article on First REIT, I received numerous inquiries about Lippo Karawaci and my thoughts on the rights issue. As the rights issue deadline approaches, I thought it would be a good time...

First REIT Update

After our previous article on First REIT, I received numerous inquiries about Lippo Karawaci and my thoughts on the rights issue. As the rights issue deadline approaches, I thought it would be a good time to share my insights.

What's Happened Since Our Last Article

Let's start with a brief update on the timeline of events related to First REIT:

June 2020 Lippo Karawaci Tbk, a major tenant of First REIT, announced that due to the COVID-19 pandemic in Indonesia, it would be restructuring its leases with First REIT.

20 July First REIT issued a profit guidance, warning that the DPU (Distribution Per Unit) would drop by 40 - 50%.

11 August SGX (Singapore Exchange) raised concerns about the accuracy of First REIT's property valuations. The response from First REIT's Board of Directors was that there were no material changes in the carrying amounts of their investment properties for 1H2020.

29 November First REIT announced a drastic restructuring of the master lease agreements with Lippo Karawaci, resulting in significant drops in rentals. This news caused a 20% decrease in the share price.

28 December First REIT announced a massively dilutive rights issue, offering 98 rights units for every 100 units, at $0.2 per unit. They also revealed that the refinancing exercise was necessary to avoid an imminent default of a $196.6 million repayment obligation due on Mar 1, 2021. The share price dropped by more than 40% in the following days.

19 Jan 2021 (NEW) During the EGM (Extraordinary General Meeting), unitholders overwhelmingly approved the restructuring and rights issue.

First REIT Shareholders

27 Jan 2021 (NEW) The Rights Issue was launched, offering 98 rights units for every 100 existing units at an issue price of $0.20 per unit. As of Friday, 5 Feb, First REIT was trading at $0.21. Unitholders have until 16 Feb (after Chinese New Year) to decide whether to accept the rights entitlement.

Update on Deep Dive into Lippo Karawaci

Many of you requested a deep dive into Lippo Karawaci, and I have been researching diligently. However, it's important to note that publicly available information is limited, and conducting a comprehensive analysis is challenging. The First REIT saga has demonstrated that relying solely on public information can be insufficient.

Valuations and book values can remain unchanged for long periods until sudden changes occur. In a market like Indonesia, public information only provides a partial picture. To truly understand Lippo Karawaci, it requires on-the-ground knowledge, insights from insiders, and a deeper understanding of the industry's dynamics. In essence, Lippo Karawaci is similar to Sincere Property Group, which we covered in our previous article—a bit of a black box with a lot of uncertainty.

As an investor, you have a few options:

  1. Find a way to become comfortable with the uncertainty by adjusting your position size and implementing stop-loss orders.
  2. Seek additional information by speaking to insiders and industry experts.
  3. Choose not to invest if the risk is too high.

Ultimately, the decision will vary for each investor based on their risk appetite, position size, and tolerance for potential losses.

Would I Subscribe for the Rights Issue?

I want to make it clear that I do not currently hold any positions in First REIT, so please take my comments with a pinch of salt. They are not intended as financial advice.

Now, let's address two significant questions:

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

If I were personally invested in First REIT and endured the decline from $1 to $0.21, here's what I would consider:

Short Term If I were in this situation, I would consider taking up the rights and hope for a price recovery in the coming weeks or months. Based on historical data, selling during the rights entitlement trading period (1st Feb - 9th Feb) may not yield favorable results. However, whether this applies to First REIT specifically is uncertain. There are many unknown factors that could impact the share price in the months ahead, such as the COVID-19 situation in Indonesia and the financial performance of Lippo Karawaci.

Long Term The long-term prospects of First REIT depend on how Indonesia handles COVID-19, the performance of the Indonesian economy and currency, and the overall performance of the Lippo group. These factors are currently unpredictable. While some investors are optimistic about emerging markets in 2021 due to a weakening US dollar, investing in First REIT requires careful consideration of position sizing and risk management. There is no one-size-fits-all approach, and each investor should evaluate their own risk appetite, position size, and ability to withstand potential losses.

For me personally, I do not currently hold any positions in First REIT, and I have no plans to open a position within the next 72 hours.

Please note that this article is based on information available as of 7th Feb 2021 and will not be updated. For the latest insights, you can join our Patron community.

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