First REIT - Long Anticipated Rights Issue

First REIT just announced its intention to carry out a rights issue at an indicative issue price of $0.20 per new unit, aiming to raise proceeds of roughly $158.2 million through the process. The intention behind the fund raising is to use the fresh funds to settle debt issue.

First, a timeline of First REITs recent history for those who are not acquainted.

History

1) 2019

First REIT's sponsor and main tenant, Lippo Karawaci, raised a large amount of funds through her own rights issue, in hopes to stabilize her own financial standings. First REIT owners at that point welcomed it, thinking that the action would ensure that Lippo can continue to pay rent to First REIT.

2) Early June 2020

Lippo announced out of the blue that they planned to restructure the unsustainable rental agreement with First REIT. While this was not shocking, the fact that First REIT's manager was blindsided and not consulted on this before the public announcement, was.

3) Mid June 2020

In the unaudited 2020 half year financial statements, we see that Lippo remains in weak financial standings, being unable to keep up with rental payments (hence being marked here as advance rental receivables) of $48 million.

For some context, referring to 1H presentation slides, that's roughly two quarters worth of rental that remained unpaid.

For un-attentive investors, this would not have set off any alarm bells, as the REIT attributed the weak performance to COVID impact.

4) July 2020

First REIT announces an extension of two months for rental relief to all tenants. At this point, it is important to note that this raised a few eyebrows, as that was an unusually long period for rental relief. Do note that both First REIT and Lippo are partly controlled by the same family, so conflict of interest issues might understandably be raised.

5) October 2020

Another two months rental relief announced. Same story, same reaction.

6) November 2020

A statement regarding rental restructuring was announced. While a massive rental cut was kind of expected, it took many by surprise that they opted to restructure rental for all properties, instead of those with expiring leases. This threw off those who did projections based on rental renewals on select properties.

Along with the actual rental restructuring itself came two important facts.

1. First REIT seems to be unable or unwilling to enforce and exercise her legal rights over rental issues. This might be a sign that the management is having trouble navigating these troubled times.

2. In refinancing talks, First REIT was only able to refinance $260 million of the original 2018 $400 million secured loan facilities, meaning that they had to cough up the $140 million difference somehow. For the inattentive, this could have been missed, as it was only briefly mentioned in slide 12 of 14 of the announcement presentation.

Present

First REIT proposes to carry out the rights issue, for proceeds of $158.2 million, just enough to cover the loan repayment. For this rights issue, OUE provided an irrevocable undertaking, meaning that it will absorb and cover for any shortfall in the rights issue if undersubscription happens.

In doing so, they will issue 791 million new units. When compared to the existing 807 million units in circulation, this means that those who do not take the rights up will effectively own half their original stake in the business, which is a massive dilution of stake, for no upside.

Those who do subscribe to this will have to inject fresh funds into the investment just to keep First REIT afloat.

Conclusion

Now that rental renewals have been settled, and a way to settle debt has been proposed, could First REIT finally stabilize? My view that this is quite possibly the case in the short term (unless COVID escalates again), but in the long term, I would not trust that the manager can defend shareholder rights.

As such, while the brave could start seeking value amidst the dirt, I would not do so, as strong performing manager and sponsors are crucial to a REIT's long-term wellbeing.

Cheers,

InvestingNugget

Author's note:

All views expressed are my own and do not constitute any investment advice that should be acted on. At the point of writing, I am not a shareholder of First REIT.