Date: January 15, 2021
First published in Business Times on 15 January 2021
ON JAN 19, unit holders of healthcare real estate investment trust First Reit, whose assets are mainly hospitals in Indonesia, will attend an extraordinary general meeting (EGM) at which two resolutions have been tabled.
Unitholders should note that voting closes on Jan 16. Unitholders should quickly familiarise themselves with what is on the table in order to make an informed decision.
Two parties are in financial difficulties. One is First Reit’s former parent, Lippo Karawaci (LK). Its distress has been brought on partly by the Covid-19 pandemic, partly by a soft Indonesian property market, and partly by a weak rupiah – it collects rent in rupiah but pays First Reit in Singapore dollars. LK has been in a negative cash flow position since 2015.
First Reit has 11 master lease agreements (MLAs) with LK, contributing 72 per cent of First Reit’s income in FY2019.
As there is a risk that LK will default on its obligations under the existing MLAs, First Reit is looking to restructure these agreements.
The proposal to restructure the MLAs forms Resolution 1 at the EGM.
The second party with financial problems is First Reit, which has about S$396 million in debt due over the next 18 months. Of, this S$197 million is due on March 1.
Because of the urgent need for cash, it is proposing a 98-for-100 renounceable rights issue at S$0.20 per unit to raise gross proceeds of S$158.2 million. The rights issue is a precondition for a refinancing facility of S$260 million.
Unitholders are not voting for or against the proposed rights issue. Instead, they are voting on a whitewash resolution waiving the right to receive a takeover offer from First Reit’s substantial shareholder OUE. OUE intends to underwrite the rights issue, but does not wish to privatise First Reit.
If the restructuring of the MLAs is not approved, the rights issue will not proceed.
If the waiver is not approved, the rights issue cannot proceed unless First Reit’s manager can arrange for the issue to be underwritten.
In its reply on what the future holds, First Reit said the new MLAs extend First Reit’s weighted average lease expiry from 7.4 years as at end-2019 to 12.6 years.
Proforma gearing is expected to be 34.4 per cent as of H1 2020, if the resolutions are passed. This delivers S$321.1 million in debt headroom (based on an assumed 50 per cent gearing threshold), allowing First Reit greater firepower to pursue acquisitions and reduce its geographic and tenant concentration risks.
There are many more details pertaining to the new MLAs, the circumstances leading to the present problems and the rights issue. These can be found on the Singapore Exchange’s website.
Unitholders are advised to evaluate these replies as well as the circulars pertaining to the EGM before casting their votes.
As this is an interested party transaction, only independent unit-holders can vote.
- The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)
