The Motley Fool

1 Yellow Flag From First Real Estate Investment Trust’s Latest Financial Update

First Real Estate Investment Trust (SGX: AW9U) has seen its share price tumble more than 15% in the past two days.

In its latest earnings update, First REIT’s headline numbers seemed normal as net property income improved and distribution per unit inched up slightly. But, if we take a closer look at its financial statement, there is one worrying thing that investors should know about.

Growing trade and other receivables

The “trade and other receivables” line on the balance sheet is the amount that is owed to the REIT by its tenants. Analysts often keep a close eye on the receivables on the balance sheet. If it is increasing out of sync with revenue, then it could be an early sign that the REIT is having difficulty collecting its rent from tenants.

If we take a look at First REIT’s balance sheet, we can see that the trade and other receivables had increased from S$25.9 million to S$49.3 million.

Source: First REIT 2018 Q3 Financial Report

On 15 October 2018, the REIT received rental payments of S$17.5 million from its tenants, which has not been accounted for in the S$49.3 million figure shown above. However, even after accounting for that, the increase in trade and other receivables is much larger than the increase in revenue of 5.4% in the first nine months of the year. 

Tenant concentration risk

Out of the 20 properties that First REIT currently owns, 17 of them are located in Indonesia and master-leased to Indonesian property giant, Lippo Karawaci. As such, Lippo contributed more than 80% of First REIT’s total rental income for the year. But worryingly for First REIT unitholders, Lippo has run into all sorts of trouble this year.

A bribery scandal surrounding Meikarta, a development project in Indonesia by one of Lippo’s subsidiaries, has already led to the arrest of one of its top executives.

Lippo’s credit rating has also been downgraded recently by rating agency, Fitch, from B to CCC+. Fitch said that Lippo has been increasingly reliant on asset sales to service its debt and that the uncertainty over sales was potentially made worse by the bribery allegations surrounding Meikarta. Moody’s, in September, downgraded the corporate family rating of Lippo as well. 

The Foolish bottom line

Sudden and sharp declines in share prices can occasionally happen due to unexpected news about a company. The recent news about Lippo’s liquidity issues can have a direct impact on First REIT’s rental income in the future and ability to claim its due.

In addition, the growing accounts receivable on First REIT’s balance sheet could be an early warning sign that the REIT is having difficulty chasing Lippo for payments. Investors should continue to look out for more updates and keep a close watch on the receivables segment of First REIT’s balance sheet in the coming quarters.

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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.