Singapore Markets open in 6 hrs 29 mins

First REIT: Key Risks to Dividends and When I Will Sell

Jeremy Chia

Recently I wrote why First Real Estate Investment Trust (SGX: AW9U) remains a key part of my investment portfolio. In that article, I explained that First REIT’s favourable rental lease terms and high yield make it an integral part of my portfolio.

Despite my fondness of First REIT, there are still risks to the investment. In this article, I highlight two key risks facing First REIT and when I will consider selling.

Risk 1: Reliance on a single tenant

Ideally, a REIT should have a diversified tenant base and should not be overly dependent on a single tenant. First REIT fails in this respect. Its main tenant, Lippo Karawaci, through its subsidiary, accounts for more than 80% of its gross rental income.

The risk of its heavy reliance on a single tenant was felt last year, when Lippo Karawaci suffered a credit downgrade, raising concerns that it would run into liquidity issues.

If Lippo Karawaci defaults on its rental obligations, First REIT would suffer a drop in cash flow and might not be able to sustain its dividend.

Risk 2: Possibility of non-renewal of master leases

There is also the risk that its main tenant will not renew its master lease contracts with First REIT.

The risk is exacerbated by the fact that a significant number of contracts expire in the same year. Five of its 20 master lease contracts for its Indonesian portfolio expire in 2021. The table below shows the lease expiry dates of First REIT’s properties:

Source: First REIT 2019 Q2 Earnings Presentation

If its main tenant decides against renewing any of these contracts, First REIT’s rental income will take a big hit. In the worst-case scenario, it might end up with no rents for those properties for an extended period.

Scenarios in which I might sell

As mentioned earlier, First REIT remains an integral part of my investment portfolio, and if everything goes as planned, I intend to keep it that way. My investment thesis is built upon First REIT’s good relationship with its key tenant (which is also its sponsor and major shareholder) and likelihood that it will be able to renew its leases with Lippo Karawaci.

However, if come 2021, Lippo Karawaci decides against renewing its contracts, I will have to reconsider my position and decide if the healthcare REIT is still worth holding on to.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia owns shares in First Real Estate Investment Trust. The Motley Fool Singapore has recommended shares of First Real Estate Investment Trust.

Motley Fool Singapore 2019