First REIT- How much is it worth Post rights and Post Covid

First REIT is restructuring and the management has been proactively persuading shareholders to accept the restructuring. First REIT has consolidated all the important information in this PowerPoint proposal which I will be relying on.

Post Renewal of Master Lease and Rights

The Reit has proposed for a rights exercise at $0.20 per share. In addition, the new master lease has the following terms (page 7 of the slides):

What stands out is how the new terms for rental is an "either/or" option for its base and variable rent; unlike the previous arrangement which was an addition of the two. Furthermore, the base rent has been drastically reduced and my sensing is that the 8.0% of preceding financial year revenue is the higher of the two.

The new terms will take effect in FY 21 if it is voted through. This means the lessee will be basing its payout to First REIT on FY 20's performance, which is when COVID happened! This means unitholders are going to suffer a drastic drop of revenue/ distribution.

How bad is it?

First REIT manager did an excellent presentation in which they showed many of the good stuff upfront but placed all the bad stuff in the annexes (at the tail end of the slides where less people read). The new arrangements is detrimental to current unitholders as seen in the below slides. Below is the effects for unitholders if First REIT were to transit to the new lease arrangement:

FY19

1HFY20 (During COVID and placed as an Annex)

Annualizing 1HFY20 results, it means First REIT's revenue will be $52.2 million against FY19's revenue of $115.3 million. This is a 54% drop. DPU has fallen to only 0.55 cents for the first six months. 

How much is First REIT worth now?

Based on FY20 results, the expected DPU for unitholders post rights and new lease arrangement is about 1.1 cents. Moving to FY21 and FY22, I think unitholders can expect only about 1+ cents of annual dividends as Indonesia has been slow in improving its COVID situation.

First REIT too has shown if it was during FY19 (when times were good), one can expect DPU of approximately 2.6 cents. However, it is unlikely the business environment in Indonesia will improve so quickly to 2019's level.

Based on the bad reputation Lippo companies have achieved during this crisis, I will expect an 8-10% yield for the risk of investing with them. If one is pessimistic enough, they can assume a 1.1 cents annual DPU for a few years with an incremental growth in DPU while expecting a 10% yield on First REIT, this will mean the shares is worth about 12-15 cents at present. Assuming (a) Lippo pays First REIT the base rental (as the higher of the two), (b) the rupiah depreciates against SGD 2% annually and (c) investors expect an 8% yield, one can expect First REIT's fair value to be in the region of 17 cents.