First REIT - Phillip Securities 2015-10-30: Lippo Group to shift REIT listing to Jakarta?

First REIT - Phillip Securities 2015-10-30: Lippo Group to shift REIT listing to Jakarta? FIRST REIT FIRST REAL ESTATE INV TRUST AW9U.SI 

First REIT - Lippo Group to shift REIT listing to Jakarta?

  • In a Business Times article dated 28 October, CEO of Lippo Group James Riady has been quoted as saying the Group plans to “shift their 2 REIT listings in Singapore to Indonesia”. The rationale for the move is to benefit from tax breaks offered by Jakarta. 
  • Last week, Indonesia’s Finance Minister Bambang Brodjonegoro has said that the government plans to remove taxes on dividends and property sales for REITs. 
  • Currently, First REIT pays a 10% withholding tax on the dividends, which is required by Indonesian tax rules on all dividends paid from an Indonesian taxpayer to an offshore tax resident. A direct listing on Jakarta would have eliminated the need for such a tax payment. 
  • Management of both First REIT and Lippo Malls Indonesia Retail Trust have since clarified that nothing has been heard from their sponsor Lippo Karawaci thus far. 
  • Since the announcement of the Group CEO’s comments, First REIT’s share price has taken a 13% beating over 2 days, dropping from $1.32 to as low as $1.15 on Friday. 
  • We examine some of the issues involved in a potential shifting of listing from Singapore to Jakarta. 

Some potential implications 

 Current Indonesia hospital rental agreements all in SGD terms. 

  • First REIT has 11 hospitals in Indonesia currently, all of which are under Master Agreements where base rents are paid in SGD, with annual increments pegged to the Consumer Price Index of Singapore. Such an arrangement was mooted when the REIT was first formed for listing in Singapore, to reduce the foreign exchange risk exposure for investors in Singapore. Shifting the listing back to Indonesia could involve the re-negotiation of all the lease terms for the hospitals. 

 Policy implementation risks involved. 

  • The comments by the Finance Minister so far follow a series of policy changes President Joko Widodo’s administration has rolled out in a bid to spur growth. While these could be plausible initiatives, the actual implementation and rolling out of these initiatives could take time. 

 Increased financing costs, country risks in Indonesia. 

  • Apart from the lower and more stable borrowing costs in SGD, Singapore also boasts a much more massive REIT listing market with easy access to institutional investor network and funding sources as a result of the stability of government policies and the Singapore dollar. Since the first REIT listing of CapitaMall Trust in 2002, Singapore has now grown to become the second largest REIT market in Asia after Japan, with a market capitalization of almost S$68b. 

 Fragmented shareholding structure. 

  • First REIT currently has a hugely fragmented shareholding structure. Apart from the top 2 shareholders, Lippo Karawaci (the sponsor) at ~27% and PT MENARA TIRTA INDAH at ~5.9%, the next biggest shareholder owns less than 2%. Shifting the listing back to Indonesia could involve a delisting which would require a 90% approval and a compelling takeover price to entice the minority shareholder groups. 

Risks to our investment thesis 

 Risks of slowing DPU growth. 

  • While we list the various hurdles involved in shifting the listing back to Indonesia, we do not discount the fact that impending policy changes in Indonesia could make it more attractive for REIT listings for Indonesian real estate assets going forward. This additional capital-recycling option in Indonesia for Lippo Group for its existing non-REIT assets could represent a slowdown in the potential injection of assets into its Singapore-listed REITs. This could mean lesser acquisition targets for First REIT or acquisitions at a slower pace, impacting year-on-year DPU growth. 

Investment Actions 

  • In light of the potential hurdles of the shifting of the listing back to Indonesia, we do not think the probability of that happening is high. 
  • We maintain our ACCUMULATE call with an unchanged DDM-derived target price of S$1.49
  • We will continue to monitor the market for updates for this development and adjust our target price when necessary.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2015-10-30
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 1.49 Same 1.49