by: Tam Ging Wien
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First REIT – a Singapore listed Real Estate Investment Trust that is mandated to invest in healthcare assets such as hospitals and nursing homes around the region; experienced one of the most dramatic plunges in REIT share price ever witnessed in recent years. This sort of share price movements are unusual among Singapore listed REITs and certainly generated a flurry of questions, comments, uncertainties and doubts in the market.
From a high of $1.42 this in January this year, it plunged to an intraday low of $0.925 on 20-Nov-2018. It’s share price has quickly recovered to close this week at $1.04.
The media has been abuzz with news of First REIT’s sponsor Lippo Karawaci experiencing a downgrade of its credit ratings from various rating agencies. Certainly, the rating agencies see clear and present risk with regards to First REIT’s parent and this will no doubt affect the sentiments of the child.
With more information now coming to light, what are the key risk that investors should take note of? Is investing in First REIT now worth the risk or should investors stay clear as risk surrounding First REIT abounds? What caused the recent shareprice decline? It is now worth a second look?
We try to answer all these questions in this 2 part series article:
From the review of the price chart of First REIT over 2018, we are able to map the share price plunge into 3 significant stages.
Source: Free Edition of REIT Screener
The first stage of First REIT’s fall occurred in February for almost 2 weeks. This stage of the fall was rather mild, falling from a high of $1.43 to a low of $1.33, just 7% decline.
This stage of the fall coincided with the global stock market rout that started in late-January. First REIT was not spared with the sell down affected it just a week later. A decline coinciding with a global stock market decline would seem very normal and likely there is little we can deduce.
The second stage for the decline was a slow and gradual decline in price from mid-June to late-August. Then the prices took a deep dive twice, once in September and another in October.
Recall that news of Lippo Karawaci’s credit downgrade from the various rating agencies came during different months throughout the year:
The other material news that occurred during this period of decline was on the 18-Sep-2019 when First REIT announced that OUE Ltd and OUE Lippo Healthcare would be acquiring a stakes in Bowsprit and First REIT. This occurred just before the credit rating downgrade from Moody’s.
Interestingly, the first sharp sell-down in early-September was almost 2 weeks ahead of the news of both the Moody’s downgrade and the OUE acquisition. At that point, the price of First REIT was trading at $1.28, 6c above the transaction price of $1.22 between Lippo Karawaci and OUE Ltd.
It would seem to us to be way too coincidental that a sharp sell-down occurred less than 2 weeks before such a major news broke. While there is no evidence of such, it wouldn’t be too far fetched to say that quite possibly, there could be an investor exit ahead of the major news. The transacted price of $1.22 provided a temporary support for First REIT’s share price.
But it wasn’t long again before another sell down sharp sell down in early-October again. About 2 weeks after the Moody’s downgrade.
The third stage of the sell down was sharp, furious and caught many market participants by surprise including ourselves. In just 2 weeks, its share price plunged from $1.16 to an intraday low of $0.925 – falling a jaw dropping 20%!
The price has somewhat recovered to $1.03 at the point of writing.
This third stage of the rout started on 14-Nov-2018 about 2 weeks after Fitch Ratings downgrade. A fashion and timeline very similar to the Moody’s downgrade that happened in early-October.
Putting both incidents of Moody’s downgrade and Fitch’s downgrade together and observing that both had almost identical 2 weeks time frame from announcement to sell-down, we could hypothesis that large funds perhaps had to let go of First REIT to rebalance their portfolio risk in light of the ratings downgrade.
Such actions by fund managers are not new as they are mandated to adhere to certain forms of risk management within their portfolios. A rating downgrade would entail increased material risk which they would be required to rebalance.
We observe from the patterns of the sell-downs and mapping to dates related to the credit rating agency downgrades we hypothesis that the rapid decline in price is likely due to institutional fund managers selling their positions in First REIT in order to balance their risk.
We also cannot completely dismiss the possibility that insiders may have also have had advance knowledge of the First REIT from Lippo Karawaci to OUE Ltd may have participated in the high volume of transitions though we are unable to offer any evidence of such.
For a more wholistic perspective of First REIT, do also review our related articles below:
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