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What Should You Do With First Real Estate Investment Trust Given the Recent Sell-Off?

At the time of writing on 20 November 2018, First Real Estate Investment Trust‘s (SGX: AW9U) unit price is S$0.93, down around 11% for the day. Yesterday, its unit price tumbled by 7%.

Just as recently as last month, the REIT was trading at a premium to its book value with a price-to-book (PB) ratio of 1.2. In other words, the REIT’s unit price was at a 20% premium to its net asset value (NAV). But at the current unit price, First REIT has a PB ratio of 0.9, or a 10% discount to its NAV.

What’s behind the sell-off?

I can only guess the reasons for the sell-off since there has been no official announcement so far from First REIT, and I see three.

The market could have been spooked by credit-rating agency Fitch’s downgrade of Lippo Karawaci‘s long-term foreign and local currency issuer default ratings. Lippo Karawaci is First REIT’s sponsor and key tenant.

Then there’s also news about bribery allegations involving a development project, Meikarta, in Indonesia by a subsidiary of Lippo Karawaci. Investigators are probing whether bribes were paid in exchange for permits to build the project.

There could also be uncertainty surrounding the involvement of OUE Ltd (SGX: LJ3) and OUE Lippo Healthcare Ltd (SGX: 5WA) in the REIT. OUE Lippo Healthcare announced in mid-September this year that it is acquiring a 10.63% stake in First REIT, and a 40% stake in Bowsprit Capital Corporation Limited, First REIT’s manager. The remaining 60% of Bowsprit Capital will be purchased by OUE Ltd, which is the parent of OUE Lippo Healthcare. The Bowsprit Capital deal was completed in late October. First REIT’s sponsor, Lippo Karawaci, has close ties to the two OUE entities.

What should you do?

I think there are two approaches to this.

If you are looking to invest in First REIT, you could wait out for the situation to become clearer. The sell-off could be unwarranted, given that there is no material news emerging from the REIT. In fact, First REIT’s 2018 third quarter earnings update, released on 16 October 2018, was decent with the REIT posting growth in revenue and distribution per unit. However, from my experience, it doesn’t pay to be a contrarian for the sake of being one. I have made my fair share of mistakes chasing after fallen angels that look undervalued, only to be proven wrong. With the current market correction, I think there are better companies out there which have more predictable businesses and growth potential, albeit at slightly higher valuations.

If you are already invested in First REIT, I would suggest not to sell out and lock in your losses, if any. “Sell first, think later” might not be a good advice to heed. On the other hand, don’t buy more units of the REIT either just to average down, unless you are sure that Mr. Market is throwing a tantrum.

Making emotional decisions would only hurt your portfolio in the long run. Wait for things to settle down and look at the issue rationally. If you indeed know that there are fundamental issues surrounding First REIT that could negatively impact its business, and that there are better opportunities for your money elsewhere, then selling could be worthwhile.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of First Real Estate Investment Trust. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.