Why Did First Real Estate Investment Trust’s Unit Price Plunge Yesterday?

First Real Estate Investment Trust (SGX: AW9U), which specialises primarily in healthcare-related properties such as nursing homes and hospitals, plunged more than 7% yesterday.

The sudden decline in price may seem strange, considering that First REIT recently reported higher distribution per unit for its most recent quarter.

One reason that could be impacting First REIT’s unit price is the downgrading of the credit rating of Lippo Karawaci, First REIT’s sponsor, key tenant, and main revenue contributor.

Troubles at its main revenue contributor and sponsor

Lippo Karawaci’s credit rating was downgraded by Fitch (one of the three major credit rating agencies) by two notches. Its long term foreign and local currency issuer default ratings was reduced from B to CCC+, as Fitch cited liquidity risks due to uncertainty over asset sales. The ratings agency has said that Lippo has been increasing reliant on asset sales to service its debt and that the uncertainty over sales was “potentially exacerbated” by the recent bribery allegations surrounding Meikarta, a development project in Indonesia by a Lippo Karawaci subsidiary.

Consequently, this had a knock-on effect on other entities linked to Lippo Karawaci, such as First REIT and Lippo Malls Indonesia Retail Trust (SGX: D5IU). Lippo Malls Indonesia Retail Trust, which is sponsored by Lippo Karawaci too, declined more than 4% yesterday.

In 2017, around 82.4% of First REIT’s rental income was contributed by Lippo Karawaci and its subsidiaries. As such, the ability of Lippo Karawaci paying its rent is of utmost importance to the stability of First REIT’s rental income.

Nevertheless, investors should also note that a decline in the credit rating of Lippo Karawaci does not immediately mean that it would not be able to meet its short term financial obligations. The company responded to the credit rating decline saying, “While execution risks remain, we believe the quality of assets make completion a high certainty even amid current volatility.” It added that it “would be well positioned to meet its liquidity needs and capitalise on compelling opportunities unique to current market volatility.”

The Foolish bottom line

Sudden and sharp declines in share prices can occasionally happen due to market participants reacting to unexpected news about a company or REIT. In the case of First REIT, concerns about the liquidity of its key tenant and major revenue contributor is perhaps one of the reasons why its unit price fell yesterday.

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